Luce v. First Equipment Leasing Corp. (In Re Luce) , 960 F.2d 1277 ( 1992 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
91-1069
_____________________
IN THE MATTER OF: BILLYE M. LUCE,
d/b/a L & L INTERNATIONAL, L & L
LEASING, and L & L INTERNATIONAL
ENTERPRISES,
Debtor.
BILLYE M. LUCE, d/b/a L & L
INTERNATIONAL, L & L LEASING
and L & L INTERNATIONAL ENTERPRISES,
Appellant-Cross-Appellee,
versus
FIRST EQUIPMENT LEASING CORPORATION
Appellee-Cross Appellant.
_________________________________________________
IN THE MATTER OF: JACK M. LUCE
and BILLYE M. LUCE, d/b/a L & L
INTERNATIONAL and L & L LEASING,
Debtors.
BILLYE M. LUCE, d/b/a L & L
INTERNATIONAL and L & L LEASING,
Appellant-Cross-Appellee,
versus
WESTINGHOUSE CREDIT CORPORATION,
Appellee-Cross-Appellant.
_________________________________________________
Appeals from the United States District Court
for the Northern District of Texas
_________________________________________________
(April 30, 1992)
ON PETITION FOR REHEARING
(Opinion March 9, 1992, 5th Cir. 1992, ___ F.2d ___ )
Before GOLDBERG, SMITH, and DUHE, Circuit Judges.
PER CURIAM:
Westinghouse Credit Corporation requested rehearing by the
panel to clarify the scope of the remand to the bankruptcy court
articulated in the panel opinion reported at slip op. 3422 (5th
Cir. Mar. 9, 1992). After careful consideration, we voted to GRANT
the petition for panel rehearing. In connection therewith, we
withdraw our earlier opinion in this appeal in its entirety and
substitute the following:
In this bankruptcy case, we examine several issues concerning
a debtor's exemption from discharge. First, must this Court
retroactively apply the preponderance of evidence standard of proof
for dischargeability exceptions as articulated by the Supreme Court
after the bankruptcy court entered judgment?; second, did the
bankruptcy court clearly err in exempting the debt under three
First Equipment Leasing Corporation leases and one Westinghouse
Credit Corporation lease from discharge?; third, did the bankruptcy
court clearly err in finding the debt from another Westinghouse
lease dischargeable?; and, fourth, did the district court err in
refusing to award the prevailing creditors either pre- or post-
petition attorney's fees?
I. BROKE LUCE
Billye and Jack Luce ("the Luces") were partners in several
partnerships in the 1980's: L & L Leasing ("LLL"), L & L
International ("LLI"), and L & L International Enterprises ("LLE")
2
(collectively, the "Luce Partnerships"). The Luces not only
operated a successful Amway distribution business, but also
purchased computer components for the purpose of combining them
into computer systems. First Equipment Leasing Corporation
("FELC") and Westinghouse Credit Corporation ("WCC") engaged in the
equipment leasing business. This case is about the unfortunate
liaison between the Luces and the equipment lessors.1
The general scheme involved procurement of commercial
financing from various finance companies. The companies leased
parts for various multi-user computer systems to the Luces and the
Luce Partnerships. The finance companies, after Jack Luce signed
an acknowledgement that the particular equipment had been received
in good order, and, in some cases, after Billye Luce had personally
guaranteed the lease payments, advanced the cost of the equipment
leased from them by the Luces and the Luce Partnerships to a
computer supplier. The computer supplier, however, was in cahoots
with Jack Luce. Instead of sending the leased equipment to the
Luce Partnerships, the equipment supplier secretly kicked back the
money it received from the finance companies to Jack Luce or the
Luce Partnerships. Out of fifteen funded leases, only two computer
systems were actually delivered. The two systems served as
collateral for at least fourteen financing transactions. In total,
1
In its opinion, the bankruptcy court provided a
complete review of the parties' claims, defenses, the stipulated
facts, and findings of fact as to FELC and WCC. First Equip.
Leasing Corp. v. Luce (In re Luce), 109 B.R. 202 (Bankr. N.D.
Tex. 1989). Rather than repeat the facts in detail, we merely
summarize them.
3
Jack and Billye Luce employed over $500,000 of the diverted funds
for personal use. The dispute we consider today concerns five
transactions with two different finance companies.
Jack, doing business as LLE, signed three equipment leases
with FELC. Billye personally guaranteed each of the leases. Jack
acknowledged that the computer system listed in each of the leases
had been delivered in good working order. In reasonable reliance
on the leases, guarantees, and acknowledgements, FELC paid a
computer system supplier ("Equipment Supplier") for the equipment.
But the Equipment Supplier never delivered the computer systems to
the Luces. Instead, the Equipment Supplier passed on approximately
seventy percent of the funds it received from FELC -- $115,500 for
each of the three systems -- to the Luce Partnerships. Jack and
Billye owe FELC almost five hundred thousand dollars under the
three equipment leases.
Both Billye and Jack Luce, doing business as LLI, signed two
other equipment leases, which the lessor later assigned to WCC.
The finance company paid the Equipment Supplier for the equipment,
then leased the equipment to the Luces. The Luces defaulted on
both leases, leaving Billye and Jack indebted to WCC for over two
hundred thousand dollars. WCC sued in state district court to
recover the unpaid balance under the two equipment leases and
sought sequestration of the collateral for the leases. Proceeds
from the sale of certain collateral sequestered and sold remains
with the Clerk of the District Court of Dallas County.
In late 1986, the Luces filed a voluntary petition for relief
4
under Chapter 7 of the Bankruptcy Code. This filing resulted in
the abatement of the state court litigation before the court made
a final determination on the merits. FELC and WCC initiated
adversary proceedings to determine the dischargeability of the
Luces' debt under the leases and guarantees. The bankruptcy court
entered an agreed judgment and order of nondischargeability against
Jack Luce in the adversary proceeding filed by FELC and in
companion adversary proceedings brought by other finance companies,
but not in the adversary proceeding filed by WCC. FELC attempted
to persuade the bankruptcy court to exempt Billye Luce's debt under
the guarantees from dischargeability under 11 U.S.C. § 523(a).2
WCC argued that neither Jack nor Billye should be discharged from
debt under the two WCC leases under 11 U.S.C. § 523(a).
After a consolidated bench trial in the adversary proceedings,
the bankruptcy court entered its findings of fact and conclusions
of law. In separate judgments, the court denied the
dischargeability of Billye Luce's entire debt to FELC and denied
2
§ 523(a) of the Bankruptcy Code ("Code") provides in
relevant part that a discharge under the Code
does not discharge an individual debtor from any debt--
. . . .
(2) for money, property, services, or an
extension, renewal, or refinancing of credit,
to the extent obtained by--
(A) false pretenses, a false representation, or
actual fraud, other than a statement respecting a
debtor's or an insider's financial condition;
. . . .
(4) for fraud or defalcation while acting in
a fiduciary capacity, embezzlement, or
larceny;
11 U.S.C. § 523(a)(2), (a)(4) (1979 & Supp. I 1991).
5
the dischargeability of Billye and Jack Luce's debt on the second
WCC lease. The court awarded both creditors pre- and post-judgment
interest and costs. The district court affirmed the judgments of
the bankruptcy court.
In this Court, Billye Luce appeals the non-dischargeability of
her debt to FELC and WCC. WCC appeals the dischargeability of
Billye and Jack Luce's debt on its first lease. FELC appeals the
denial of pre- and post-petition attorney's fees only as to Billye,
but WCC appeals the denial of attorney's fees as to both Billye and
Jack.3 We affirm in part, vacate in part, and remand for further
proceedings consistent with this opinion.
II. PLAYING FAST AND LUCE
We set aside findings of fact by a bankruptcy court only when
they are clearly erroneous. Jordan v. Southeast Nat'l Bank (In re
Jordan), 927 F.2d 221, 223-24 (5th Cir. 1991) (citing Bankr. Rule
8013). We engage in a de novo review of the bankruptcy court's
conclusions of law. Id. at 224 (citing Bankr. Rule 8013). Since
"[d]eterminations as to the dischargeability of debts under section
523 are reviewed under the clearly erroneous standard," we subject
only the bankruptcy court's conclusions as to attorney's fees to de
novo review. See Cheripka v. Republic Ins. Co. (In re Cheripka),
No. 91-3249, 1991 WL 276289, at *10 (3rd Cir. Dec. 31, 1991)
(citations omitted).
3
Jack Luce has not filed a brief in this appeal.
6
A. Retroactive Application of Grogan
In Grogan v. Garner the Supreme Court announced a new rule:
The "standard of proof for the dischargeability exceptions in 11
U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence
standard." Grogan v. Garner, 111 S. Ct. 654, 661 (1991). The rule
that a creditor must establish the nondischargeability of its claim
by a preponderance of the evidence displaced the clear and
convincing evidence rule utilized by the Court of Appeals for the
Eighth Circuit in reversing the Grogan district and bankruptcy
courts. Id. at 656-57; see id. at 657 & n.7 (noting that "most
other Circuits" required proof by clear and convincing evidence to
avoid dischargeability under § 523).
The Court decided Grogan, however, after the bankruptcy court
and district court entered judgments in this proceeding. Since the
bankruptcy court and the district court apparently required both
FELC and WCC to prove the nondischargeability of their claims by
clear and convincing evidence,4 the creditors assert that this
Court should remand to allow the bankruptcy court to make findings
of fact based upon the lower preponderance of the evidence
standard. Both creditors urge this Court to apply the
4
Other decisions by the bankruptcy court judge indicate
his consistent application of the clear and convincing standard.
See, e.g., Zervas v. Nix (In re Nix), 92 B.R. 164, 169 (Bankr.
N.D. Tex. 1988); Norton v. Dean (In re Dean), 79 B.R. 659, 662
(Bankr. N.D. Tex. 1987). The memorandum order of the district
court exhibits application of the clear and convincing standard.
Mem. Order at 9.
7
preponderance of the evidence standard adopted in Grogan
retroactively.
The issue before us, then, is whether we must apply the lower
standard of proof articulated in Grogan retroactively. The
threshold question under James B. Beam Distilling Co. v. Georgia,
111 S. Ct. 2439 (1991), is whether the Supreme Court applied the
rule enunciated in Grogan to the parties in that case. See
Sterling v. Block, No. 90-3913, slip op. at 2572 (5th Cir. Jan. 30,
1992). For "[o]nce retroactive application is chosen for any
assertedly new rule, it is chosen for all others who might seek its
prospective application." Beam, 111 S. Ct. at 2447-48.5 Although
Grogan did not overtly address the retroactivity issue, nor reserve
the question of whether its holding applied to the parties before
it, we read the case as "follow[ing] the normal rule of retroactive
application in civil cases" and applying the preponderance of the
evidence standard retroactively to the parties before the Court.
Grogan, 111 S. Ct. at 661 (reversing the judgment of the court of
appeals that creditors who obtained a judgment of fraud in a
jurisdiction requiring proof by a preponderance of the evidence
could not invoke collateral estoppel in the bankruptcy court
because the clear and convincing evidence standard applied to the
fraud exception from discharge under § 523); see Beam, 111 S. Ct. at
2445.
5
We do not apply the factors set out by the Supreme
Court in Chevron Oil v. Huson, 92 S. Ct. 349, 355-56 (1971), "if
the rule was retroactively applied to the parties in the case in
which it was originally announced." Sterling, slip op. at 2572
(citing Beam, 111 S. Ct. at 2446).
8
Since the Grogan Court applied its own rule, we must impose
the Grogan preponderance of the evidence standard retroactively in
this case. We remand the section 523 claims delineated in part
II(C) to the district court to enable it to find whether WCC
sustained its burden of proof under the preponderance of the
evidence standard enunciated in Grogan.
B. Nondischargeability of Billye Luce's Debt to FELC and WCC
A discharge in bankruptcy "does not discharge an individual
debtor from any debt . . . for money, property, services, or an
extension, renewal, or refinancing of credit, to the extent
obtained by . . . false pretenses, a false representation, or
actual fraud . . . ." 11 U.S.C. § 523(a)(2)(A) (Supp. 1991).
Although the bankruptcy court found that Billye Luce did not
participate directly in Jack Luce's fraud, it imputed Jack Luce's
fraudulent misrepresentations to Billye Luce based on several
findings, which are all amply supported by the record.
First, Jack Luce did "obtain money, services and an extension
of credit from FELC by false pretenses, false representations and
actual fraud." Luce, 109 B.R. at 206. Jack Luce made false
representations to WCC about the existence of the equipment covered
by the second WCC lease within the meaning of 523(a)(2)(A). Id. at
209. Billye Luce does not challenge these findings that Jack
Luce's actions constituted "false pretenses, false representations,
or actual fraud" within the meaning of § 523(a)(2)(A). Second,
9
Billye and Jack Luce were partners in the Luce Partnerships during
the time of Jack Luce's fraudulent misrepresentations to both FELC
and WCC. Id. at 206, 209. Third, Jack Luce acted on behalf of the
Luce Partnerships and in the ordinary course of the business of the
Partnerships when he made the false representations. As Jack
Luce's partner, Billye Luce certainly "shared in the monetary
benefits" of Jack Luce's fraud. Id. Based on these findings, the
bankruptcy judge imputed the "knowledge and actions" of Jack Luce
to Billye Luce. Id. at 206.
Billye Luce challenges the district court's affirmance of the
bankruptcy court's determination that her debt to WCC on the second
lease and to FELC was nondischargeable under section 523(a)(2)(A),
arguing that the court clearly erred. Billye Luce contends that
because she did not know about Jack Luce's fraudulent
representations and because Jack Luce's fraudulent representations
to FELC and WCC were outside the scope of the business of the Luce
Partnerships, his knowledge and actions cannot be imputed to her,
the "innocent partner." Moreover, Billye Luce argues that FELC and
WCC failed to sustain their burden of proof because the evidence
did not show that she actually obtained any money, property or
services by fraud or benefitted monetarily from Jack Luce's fraud.
Over a century ago, the Supreme Court established that
a partner's fraud [can] be imputed to a debtor to make a
debt non-dischargeable under § 17(a)(2) of the Bankruptcy
Act, [the predecessor statute to 11 U.S.C. § 523(a)(2)].
This is true not only where the debtor did not consent to
h[er] partner's fraudulent acts, but where [s]he had no
knowledge or reason to have knowledge of these acts.
Federal Dep. Ins. Corp. v. Calhoun (In re Calhoun), 131 B.R. 757,
10
760-61 (Bankr. D.D.C. 1991) (discussing Strang v. Bradner, 5 S. Ct.
1038, 1041 (1885)). Our research confirms that "the lower courts
have held that the rule continues that fraud can be imputed to an
innocent partner regardless of his knowledge or involvement for
purposes of 11 U.S.C. § 523(a)(2)(A)." Id. at 761.6
The evidence demonstrates that Jack Luce entered into the
equipment leases on behalf of the Luce Partnerships and in the
ordinary course of the business of the Luce Partnerships. Billye
Luce argues that she was a partner only in the "Amway business" and
6
See BancBoston Mortgage Corp. v. Ledford (In re
Ledford), 127 B.R. 175, 184 (M.D. Tenn. 1991) ("authorities in
agreement that the fraud of one partner may be imputed to another
for determining dischargeability under 11 U.S.C. § 523(a)(2));
Terminal Builder Mart v. Warren (In re Warren), 7 B.R. 571, 573
(Bankr. N.D. Ala. 1980) (question "well settled" that "a debt
arising from the obtaining of goods by false pretenses of a
partner, acting for the partnership, constitutes a claim which is
not dischargeable in bankruptcy as to the misbehaving partner,
the partnership, or an innocent partner"); cf. Impulsora Del
Territorio Sur, S.A. v. Cecchini (In re Cecchini), 780 F.2d 1440,
1443 (9th Cir. 1986) (imputing partner's knowledge and intent to
debtor under § 523(a)6) because partner acted on behalf of the
partnership and in the ordinary course of the business of the
partnership in converting funds); Love v. Smith (In re Smith), 98
B.R. 423, 426 (Bankr. C.D. Ill. 1989) ("Many courts have found
that fraud committed by an agent would render a debt
nondischargeable as to a debtor-principal under § 523(a)(2));
Fluehr v. Paolino (In re Paolino), 75 B.R. 641, 649 (Bankr. E.D.
Pa. 1987) (holding that if husband acted as wife's agent within
the scope of the agency relationship, then the agent's fraud
could be imputed to the principal under § 523(a)(2)); Citizens
State Bank v. Walker (In re Walker), 53 B.R. 174, 179 (Bankr.
W.D. Mo. 1985) ("fraud of an authorized agent, without more, has
continually been recognized as a ground of nondischargeability").
As noted by the bankruptcy court in Calhoun, a "few sharply
criticized" decisions have refused to impute the fraud of an
agent to the principal without proof that the principal knew or
should have known of the agent's fraud. For a critical
discussion undermining the reasoning of those decisions, see
Calhoun, 131 B.R. at 761; Paolino, 75 B.R. at 648-49; Walker, 53
B.R. at 179-81.
11
not in the "computer business." Thus, she reasons, Jack Luce's
fraud was outside the scope of the "Amway business." These two
"businesses" were both the business of the Luce Partnerships,
however. Billye Luce, Jack Luce's partner in the Luce
Partnerships, signed leases, guarantees and acceptances of delivery
connected with the lease financing.
Under section 523 (a)(2)(A), a debtor is not discharged from
any debt for money, property, services or credit obtained by fraud.
Billye Luce maintains that her debt to FELC and WCC remains
dischargeable because she never actually obtained any money,
property, services or credit for herself by fraud. The test under
section 523(a)(2)(A), however, is not whether the debtor actually
procured the money, property, services or credit for him or
herself. 3 Collier on Bankruptcy ¶ 523.08[1] (15th ed. 1991).
Rather, the Code dictates that a particular debt is
nondischargeable "[i]f the debtor benefits in some way" from the
money, property, services or credit obtained through deception.
Century First Nat'l Bank v. Holwerda (In re Holwerda), 29 B.R. 486,
489 (Bankr. M.D. Fla. 1983) (holding that debtor who was a
principal of a corporation "'obtained money' within the meaning of
§ 523(a)(2)" when the creditor approved a loan to the corporation).
Despite Billye Luce's testimony that she "never saw one dime
of that money," the evidence shows that Billye Luce did benefit
from Jack Luce's fraud. As a partner, Billye Luce benefitted when
the Equipment Supplier passed on funds received by it from the
equipment lessors to the Luce Partnerships. Most of the money
12
obtained from the equipment lessors went into Billye and Jack
Luce's joint bank accounts. In turn, the money in the joint bank
accounts was used to acquire real estate, stock and oil and gas
investments held jointly by Billye and Jack Luce, to pay business
and personal expenses of the Luces, and to make payments on leases
and loans, some of which Billye Luce had personally guaranteed.
Our review of the record thoroughly convinces us that the
district court did not commit clear error when it affirmed the
bankruptcy court's findings that FELC and WCC established,
apparently by clear and convincing evidence, that Billye and Jack
Luce's debt to WCC on the second lease and Billye Luce's debt to
FELC were nondischargeable under 11 U.S.C. § 523(a)(2)(A). FELC
and WCC were held to and satisfied a higher burden of proof than
that required by Grogan. Our decision affirming the district
court's judgments "necessarily means that the creditor[s] would
have prevailed under a preponderance standard." Arkansas Aluminum
Alloys, Inc. v. Joyner (In re Joyner), 132 B.R. 436, 439 (D. Kan.
1991).
C. Dischargeability of the Luces' Debt to WCC on the First Lease
In contrast to the equipment on the second WCC lease, which
the Equipment Supplier did not deliver to the Luces, the bankruptcy
court found that the Equipment Supplier "substantially delivered"
13
the equipment on the first WCC lease to the Luces.7 Thus, any
representations made by Jack Luce concerning the existence of the
equipment on the first WCC lease were not false. WCC argues that
the bankruptcy court erred in failing to make findings of fact
relating to WCC's independent theories of nondischargeability under
section 523(a)(2) as to the debt on the first WCC lease.8 First,
WCC argues that not only did Jack Luce falsely represent the
existence of the equipment, but that Jack Luce included false
representations in the application for the first WCC lease and
7
Contrary to WCC's assertion, the bankruptcy court did
not clearly err in finding that the equipment on the first WCC
lease was "substantially delivered." The record supports this
finding.
8
WCC also argues that it established its damages for
Jack Luce's conversion of the equipment on the first WCC lease by
a preponderance of the evidence. WCC misconstrues the nature of
the bankruptcy court's findings, however. WCC concedes that "the
issue of conversion was not asserted by any party or the court as
an issue during trial." Not only did the bankruptcy court raise
the conversion issue sua sponte, but it merely addressed the
matter in dicta. The bankruptcy court simply noted that Jack
Luce might have changed the serial numbers on particular
equipment on the first WCC lease. If proved by WCC, such
activity would have constituted conversion of WCC's collateral
under § 523(a)(6). Even if WCC had proved conversion, though,
WCC "failed to offer valuation testimony on allegedly converted
collateral on the first lease."
Even if we were to entertain an argument urging a statutory
basis for nondischargeability not asserted below, it seems quite
apparent that WCC did not satisfy its burden of proof as to the
"willful and malicious activity" necessary to establish
conversion of its collateral, nor did it meet the benchmark for
proving damages for conversion because it offered no valuation
evidence. First State Bank v. Iaquinta (In re Iaquinta), 98 B.R.
919, 925 (Bankr. N.D. Ill. 1989) ("The fair market value of the
converted collateral under § 523(a)(6) is the appropriate measure
of damages for conversion.") (citing Morsovillo v. Krause (In re
Krause), 44 B.R. 159, 163 (Bankr. N.D. Ill. 1984)); see Haile v.
McDonald (In re McDonald), 73 B.R. 877, 882 (Bankr. N.D. Tex.
1987).
14
obtained the lease financing under false pretenses. WCC contends
that Jack Luce falsely represented that the equipment would be used
in the Amway part of LLI's business while harboring a secret intent
to use the money for other purposes, and that WCC detrimentally
relied on the false representation in its evaluation and approval
process. This evidence, according to WCC, provides an alternative
basis for determining that Jack Luce fraudulently obtained the
first WCC lease under section 523(a)(2)(A).9
Second, WCC maintains that Billye Luce acted with reckless
indifference in blindly signing the first WCC lease for over
$100,000 worth of equipment without regard for its truth or
falsity. WCC argues that Billye Luce never asked questions or made
objections when she signed obligations on behalf of the Luce
Partnerships. WCC contends that this reckless indifference
constitutes a "false representation" under section 523(a)(2)(A).
WCC also argues that Billye Luce's reckless indifference to the
fraud of her agent, Jack Luce, in obtaining the first WCC lease
renders her responsible for that fraud. Under either reckless
indifference theory, WCC argues that Billye Luce's debt on the
first lease is nondischargeable under section 523(a)(2)(A).10
9
Billye Luce responds that this argument seems to be
directed only to Jack Luce. If Jack Luce obtained the first
lease on behalf of LLI while acting in the ordinary court of
partnership business, however, any fraud on Jack Luce's part
could be imputed to his partner, Billye Luce. See supra p. 11 &
n.6.
10
The district court explained the bankruptcy court's
lack of findings on whether Billye Luce was recklessly
indifferent in signing the first lease: "The case authority
cited by [WCC] . . . does not deal with a key factor in this
15
The bankruptcy court did not make specific findings of fact
regarding the fraud of Jack Luce in obtaining the first WCC lease
or the reckless indifference of Billye Luce in signing the first
WCC lease. Federal Rule of Civil Procedure 52(a), which applies in
adversary proceedings under Bankruptcy Rule 7052, requires a
bankruptcy court to "find the facts specially" in all cases tried
upon the facts without a jury. See Texas Extrusion Corp. v.
Palmer, Palmer & Coffee (In re Texas Extrusion Corp.), 836 F.2d
217, 220 (5th Cir.), order aff'd, 844 F.2d 1142, cert. denied, 109
S. Ct. 311 (1988); Cities Serv. Co. v. Ocean Drilling and
Exploration Co., 758 F.2d 1063, 1072 (5th Cir. 1985). "Findings of
fact are especially important when the trial court's decision turns
in part upon factual determinations." Texas Extrusion, 836 F.2d at
220. Since we have no opportunity, as did the bankruptcy judge
during the bench trial, to "judge the credibility of the
witnesses," the determination of the dischargeability of the Luces'
debt under section 523(a) presents a question of fact properly
case, viz., the fact that the partner with whom Billy Luce signed
the lease agreements was her husband of twenty-five years. Given
the Luce's marital relationship," the district court found no
error. Billye Luce similarly characterizes this case as one
"about an innocent, trusting, naive wife."
We view the imputation issue as one about business partners.
It is irrelevant to the determination of the dischargeability of
Billye Luce's debts under section 523(a)(2) that the business
partners also enjoyed a marital relationship. The concepts of
law we employ do not turn on the nature of the marital
relationship, but on the nature of the business relationship
between the Luces -- the Luce Partnerships. The picture of
Billye Luce as a woman who dutifully served her husband's
interests without questions and without options ignores the
import of her college education and extensive business
experience.
16
resolvable by the bankruptcy court. Fed. R. Civ. P. 52(a).
We vacate the judgment of the district court affirming the
bankruptcy court's judgment with respect to the Luces' debt on the
first WCC lease. We remand to enable the bankruptcy court to
determine whether WCC proved its independent theories of
nondischargeability as to the debt on the first WCC lease by a
preponderance of the evidence. Specifically, 1) Did WCC prove by
a preponderance of the evidence that Jack Luce made false
representations in obtaining the first WCC lease, rendering Jack
Luce's debt on that lease nondischargeable under section
523(a)(2)(A)? If so, is that fraud properly imputed to Billye Luce
under the standards set forth in section II(B) of this opinion,
rendering Billye Luce's debt on the first WCC lease
nondischargeable under section 523(a)(2)(A)?; 2) Did WCC prove by
a preponderance of the evidence that Billye Luce acted with
reckless indifference with respect to the first WCC lease,
rendering Billye Luce's debt on the first WCC lease
nondischargeable under section 523(a)(2(A)?
D. Attorney's Fees
The district court affirmed the bankruptcy court's denial of
all attorney's fees to both FELC and WCC. On cross-appeal, both
creditors seek prepetition attorney's fees, or, alternatively,
postpetition attorney's fees. We review these questions of law de
novo.
17
1. Prepetition Attorney's Fees.
Both FELC and WCC claim entitlement to attorney's fees
incurred before the Luces filed a voluntary petition for relief
under Chapter 7 of the Bankruptcy Code. WCC instituted suit to
recover the unpaid balance on its equipment leases in state
district court before the Luces filed under Chapter 7. The state
court did not finally determine the merits of the dispute.
In Klingman the bankruptcy court held that a creditor who
prevailed under section 523(a)(4) could recover prepetition
attorney's fees awarded in state court. Klingman v. Levinson (In
re Levinson), 58 B.R. 831, 837 (Bankr. N.D. Ill. 1986), aff'd, 66
B.R. 548 (N.D. Ill. 1986), aff'd, 831 F.2d 1292 (1987); cf. Galpin
v. Galpin (In re Galpin), 66 B.R. 127, 132 (N.D. Ga. 1985) (holding
that the "bankruptcy court should not . . . award attorney's fees
for work on proceedings in state court that have not been awarded
by the relevant state court."). When a bankruptcy court determines
that the underlying debt is nondischargeable, then "attorney's fees
awarded by a state court based on state statutory or contractual
grounds are [also] nondischargeable." Levinson, 58 B.R. at 837 n.7
(citations omitted). The Levinson court reasoned that the
"attorney's fees are part of the state court judgment." Id.; see
Texas Venture Partners v. Christian (In re Christian), 111 B.R.
118, 122 (Bankr. W.D. Tex. 1989) (holding that attorney's fees
awarded to creditors in a state court final judgment were
nondischargeable under § 523(a)(2)(A) (citations omitted). We
have not found, nor have the creditors directed our attention to,
18
any cases holding that prepetition attorney's fees are
nondischargeable under section 523(a) absent a state court judgment
awarding attorney's fees to the creditors.
The state courts did not award attorney's fees to FELC or WCC.
FELC did not even proceed against the Luces or the Luce Partnership
in state court.11 The state court did not enter a final judgment
in the case brought by WCC to recover the unpaid balances on its
equipment leases. We agree with the district court's affirmance of
the bankruptcy court's denial of prepetition attorney's fees to
FELC and WCC.
2. Postpetition Attorney's Fees.
FELC and WCC also seek postpetition attorney's fees incurred
by them in litigating this adversary proceeding. After the
bankruptcy court and district court entered judgments in this
adversary proceeding, this Court decided Jordan v. Southeast Nat'l
Bank (In re Jordan), 927 F.2d 221 (5th Cir. 1991). In Jordan this
Court first confronted the issue of whether postpetition attorney's
fees incurred by prevailing creditors are exempt under 11 U.S.C.
523(a)(2). We explicitly adopted the Sixth Circuit's approach:
11 U.S.C. § 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 (quoting Martin v. Bank of Germantown (In re Martin),
761 F.2d 1163, 1168 (6th Cir. 1985) (emphasis added)); see
11
The record indicates that FELC did proceed in state
court against the Equipment Supplier and individuals other than
the Luces.
19
Transouth Fin. Corp. v. Johnson, 931 F.2d 1505, 1509 (11th Cir.
1991). Like section 523(a)(2)(B), section 523(a)(2)(A) excepts
from discharge the debt incurred "by false pretenses, a false
representation, or actual fraud," which encompasses "state-approved
contractually required attorney's fees." Cf. Davidson v. Davidson
(In re Davidson), 947 F.2d 1294, 1298 (5th Cir. 1991) (following
Jordan holding that "where a party has contracted to pay attorneys'
fees for the collection of a nondischargeable debt, the fees also
will not be discharged in bankruptcy" in a § 523(a)(5) case).
Although "prevailing creditors still have no statutory right
to attorney's fees" because section 523(d) only gives prevailing
debtors a right to attorney's fees in an adversary proceeding, we
reconciled giving prevailing creditors the contractual right to
attorney's fees with both the statutory language and legislative
history of section 523(d). Jordan, 927 F.2d at 227 (quoting
Martin, 761 F.2d at 1168) (emphasis added).12 Of course, a creditor
can only recover postpetition attorney's fees when that right
arises from a contract between the creditor and the debtor that is
enforceable under state law. Transouth, 931 F.2d at 1509; Jordan,
927 F.2d at 227.
12
For a thorough discussion reconciling the statutory
language and legislative history of § 523(d) with the recovery of
postpetition attorney's fees by a prevailing creditor based on
the creditor's contractual right to attorney's fees, see
Transouth, 931 F.2d at 1509; Jordan, 927 F.2d at 227-28; Martin,
761 F.2d at 1167-68. But see Transouth, 931 F.2d at 1514-18
(Clark, J., dissenting) ("validity under state law of a
contractual provision for attorney's fees [does not] control[]
when Congress expressly evidences an intent to disallow such
fees.").
20
We vacate the judgment of the district court affirming the
judgment of the bankruptcy court denying FELC and WCC postpetition
attorney's fees. We remand to allow the bankruptcy court to
examine the enforceability of any provisions in the FELC and WCC
leases or guarantees entitling FELC to attorney's fees as against
Billye Luce or entitling WCC to attorney's fees as against Billye
or Jack Luce. If those provisions are enforceable under state law,
then the bankruptcy court should determine the appropriate
postpetition attorney's fees.
III. A FEW LUCE ENDS
For the reasons stated above, we AFFIRM in part, VACATE in
part, and REMAND for further proceedings consistent with this
opinion.
21