Valley Title & Escrow Agency, Inc. v. Metzger (In re Metzger)

In re: Case No. 09-51077 Rebecca H. Metzger, Debtor.Valley Title & Escrow Agency, Inc., Plaintiff.

v.Rebecca H. Metzger, Defendant.

Adv. Pro. No. 09-2211

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF OHIO EASTERN DIVISION

Dated: July 28, 2011

Chapter 7

Judge Caldwell

ORDER GRANTING DEFENDANT'S MOTION FOR ATTORNEY'S FEES AND

COSTS (DOC. NO. 40) AND AWARDING SANCTIONS BASED UPON AN ORDER TO

SHOW CAUSE PURSUANT TO FED. R. BANKR. P. 9011(c) (DOC. NO. 42)

Rebecca H. Metzger ("Defendant") seeks defense fees and costs incurred in this adversary proceeding commenced by Valley Title and Escrow Agency, Inc. ("Plaintiff). Serving as a fiduciary in a real estate refinance transaction, Plaintiff gave the Defendant a check for $26,246.00 by mistake, and then waited 13 months to discover its own error. This failure was exacerbated by Plaintiff's unsuccessful pursuit of dischargeability litigation.

To compensate Defendant for the lost time and expense, the Court awards damages in the amount of $2,585.12, pursuant to Section 523(d) of the United States Bankruptcy Code ("Code") and $11,565.60 pursuant to Rule 9011 of the Federal Rules of Bankruptcy Procedure. A brief summary follows.

As detailed in the dischargeability ruling (Valley Title and Escrow Agency, Inc. v. Metzger (In re Metzger), 442 B.R. 121 (Bankr. S.D. Ohio 2010)), Plaintiff served as a fiduciary and closing agent when Defendant refinanced her home. Not only did Plaintiff give Defendant a larger check then originally intended, but failed to correct the error that very day when questioned by the Defendant's husband. Indeed, the error was not detected for another thirteen months and long after the proceeds were expended to pay Defendant's financial obligations, as originally contemplated by the refinance transaction.

Upon discovering its oversight, Plaintiff sent Defendant a demand letter for the excess monies, later followed by a lawsuit filed in state court. Defendant filed bankruptcy under Chapter 7, staying the state court proceeding. Plaintiff then filed the instant adversary proceeding seeking a declaration that the debt was non-dischargeable based upon sections 523(a) (2) (false pretenses), 523(a) (4) (fraud or embezzlement), and 523(a) (6) (willful and malicious injury) of the Code.

Two of these causes of action were abandoned only during the course of a hearing on Defendant's motion to dismiss. Specifically, Plaintiff started the hearing by declaring its intent to voluntarily dismiss the 523(a) (4) claim. Later on in the hearing and only after questioning by the Court about the level of proof required to establish intent to sustain a 523(a) (2) claim, Plaintiff admitted that there also was no basis for this claim, and agreed to its voluntarydismissal. Despite these significant concessions, Plaintiff persisted with the 523(a) (6) claim, taking this claim to trial, even though it was based upon the same set of facts.

After trial, the Court found for Defendant, holding that the Plaintiff failed to carry its burden of proof for any of the causes of action originally pursued. Defendant then filed its Motion seeking fees and costs amounting to $14,150.72 under 523(d) for the successful defense against a creditor adversary with a 523(a) (2) component (Doc. No. 40). The Court entered an order on March 4, 2011 (Doc. No. 42), scheduling further briefing on the issue of shifting fees and costs, requiring the Defendant to submit detailed billing information, and stating that as the Court was also considering the imposition of sanctions under Federal Bankruptcy Rules of Procedure Rule 9011, the parties should address the propriety of doing so.

Section 523(d) of the Code attempts to curb vexatious and burdensome litigation by creditors. In re Carmen, 723 F.2d 16, 16-18 (6th Cir. 1983). Section 523(d) provides sanctions for a successful defense of a creditor's claim premised under 523(a)(2) of the Code when the creditor's position was not "substantially justified" and no "special circumstances" otherwise mitigate imposing sanctions. Nat'l City Bank v. Beatty (In re Beatty), 401 B.R. 278, 280 (Bankr. S.D. Ohio 2009).

Plaintiff demonstrated throughout this adversary that it pursued the 523(a) (2) claim without regard for its merits. Plaintiff's fact-finding procedures should have revealed that error in this case rested on the Plaintiff's shoulders. To reiterate, it gave the Defendant the wrong check, ignored her spouse's questioning of the higher amount, and then failed to discover its own error for thirteen months. The Court finds and concludes that a party conducting a reasonable inquiry under the circumstances would have more carefully considered the possibility of success on these facts and would not have filed the claim. Plaintiff did not have substantial justificationfor the 523(a) (2) claim, and there are no equitable circumstances that mitigate shifting Defendant's fees to Plaintiff.

However, the Court only shifts fees and costs under 523(d) for those costs Defendant incurred while defending an active 523(a)(2) claim;...