Weinschneider, Sidne v. Hoseman, Daniel ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-1828
IN RE:
SIDNEY WEINSCHNEIDER,
Debtor-Appellant.
____________
Appeal from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 03 C 5274—Joan B. Gottschall, Judge.
____________
ARGUED NOVEMBER 10, 2004—DECIDED JANUARY 18, 2005
____________
Before POSNER, WOOD, and EVANS, Circuit Judges.
EVANS, Circuit Judge. Sidney Weinschneider, a Chapter 7
debtor in bankruptcy, appeals from the district court’s af-
firmance of an order of the bankruptcy court denying his
request for attorney fees from the bankruptcy estate.
A brief history of the case may provide context for
Weinschneider’s request. He filed for bankruptcy under
Chapter 11 after his nursing home business ran into finan-
cial difficulties. The proceeding was converted to a Chapter 7
case and Daniel Hoseman was appointed trustee. Soon after
the conversion, a committee of unsecured creditors filed an
adversary action against Weinschneider, demanding that he
turn over certain property to the estate. The trustee, on
2 No. 04-1828
behalf of the creditors, settled that litigation. In connec-
tion with the settlement, the trustee executed a contract
containing a release and covenant not to sue. Under the
document, the trustee agreed to release “all claims, known
or unknown” against Weinschneider, his wife, and certain
trusts. In addition, the trustee agreed not to institute, pros-
ecute, or participate in any action to collect or enforce any
claims, “known or unknown” that the estate could have
against Weinschneider, his wife, or the trusts.
While the bankruptcy case was proceeding, Weinschneider
filed a breach of contract action in Illinois state court against
his former business associates, claiming a 23 percent own-
ership in their nursing home management operation. Orig-
inally, Weinschneider did not inform the trustee of the ex-
istence of the lawsuit. However, in response to
Weinschneider’s second amended complaint, the defendants
to the state court lawsuit alleged that the case belonged in
the bankruptcy court. At that point, the state court judge
instructed the parties to give the bankruptcy trustee notice
of the pending suit.
After he learned of the state court action, the trustee
brought an adversary complaint against Weinschneider in
the bankruptcy court, seeking a declaratory judgment that
the state court lawsuit was the property of the bankruptcy
estate. Weinschneider raised, as a defense to the lawsuit,
the release and covenant not to sue. In response, the trustee
argued that Weinschneider fraudulently induced the exe-
cution of the covenant and the release by failing to disclose
all of his business interests, and that rendered the release
and covenant void.
After a trial on the adversary action, the bankruptcy court
ruled for the trustee. He found that Weinschneider fraudu-
lently induced the execution of the covenant and the
release. On appeal, the district court reversed, finding that
the covenant and release were not fraudulently induced and
No. 04-1828 3
that those documents barred the trustee’s suit. The district
court entered judgment for Weinschneider. We affirmed the
judgment. Hoseman v. Weinschneider, 322 F.3d 468 (7th
Cir. 2003).
With that backdrop, we finally arrive at the proceeding
giving rise to this appeal. After our decision, Weinschneider
filed a motion with the bankruptcy court seeking over
$500,000 in attorney fees and costs he claimed he incurred
in successfully defending against the declaratory judgment
action. The bankruptcy court denied his motion and the dis-
trict court affirmed. Weinschneider’s current appeal is from
that order. He contends that 11 U.S.C. §§ 503(b)(1)(a) and
507(a)(1) and Reading Co. v. Brown, 391 U.S. 471 (1968),
permit him to recover as an administrative expense his
damages (i.e., attorney fees) for breach of the covenant not
to sue; that Illinois law permits him to recover damages (as
in attorney fees) for the breach of a covenant not to sue; and
that the contract, which includes the covenant not to sue,
allows the recovery of attorney fees for breach of the cove-
nant. We reject each contention.
Reading is of no help to Weinschneider. In that case, a
building owned by the debtor burned while the debtor was
under the protection of a bankruptcy receivership. An ad-
jacent building was destroyed by the fire. The owner of the
adjacent building claimed that the damages he suffered in
the fire should be considered an administrative expense and
receive priority in the bankruptcy action. The Court found
that the claim was allowable as an “actual and necessary”
expense:
In the first place, in considering whether those injured
by the operation of the business during an arrangement
should share equally with, or recover ahead of, those for
whose benefit the business is carried on, the latter
seems more natural and just.
4 No. 04-1828
Reading, 391 U.S. at 482. This statement reveals at least
three things which differentiate that case from
Weinschneider’s. First, the Reading action was a claim for
tort damages; that is, the destruction of the building, which
occurred on the trustee’s watch. Second, the beneficiary of
the Court’s holding was a third party. And finally, the issue
was one of priorities. In other words, it was clear that
Reading had a claim based on the trustee’s negligence; the
issue was whether his claim should take priority over other
claims.
Here, Weinschneider is, of course, not a third party, and
the relief he seeks is attorney fees to defend a case brought
against him by a trustee, who was acting properly. Reading
cannot provide the basis of his claim for attorney fees.
Nor can his claim arise from the Bankruptcy Code itself.
Sections 503 and 507 do not help Weinschneider establish
his claim. Section 503(b)(1)(A) permits the payment of “ac-
tual, necessary costs and expenses of preserving the estate,
including wages, salaries, or commissions for services ren-
dered after the commencement of the case” as administra-
tive expenses. Section 503(b)(2) concerns the payment of
compensation, including attorney fees, as administrative
expenses. It limits those fees to “compensation and reim-
bursement awarded under section 330(a).” What § 330
means, however, has not always been clear. See In re Pro-
Snax Distribs., Inc., 157 F.3d 414 (C.A.5 1998); In re
American Steel Prod., Inc., 197 F.3d 1354 (C.A.11 1999); but
see In re Ames Dep’t Stores, Inc., 76 F.3d 66 (C.A.2 1996); In
re Top Grade Sausage, Inc., 227 F.3d 123 (C.A.3 2000); In
re Century Cleaning Servs., Inc., 195 F.3d 1053 (C.A.9
1999).
The difference in interpretation arose after the statute
was revised. Prior to the revision, § 330 allowed reasonable
compensation for actual and necessary services performed
by a “professional person employed under section 327 or
No. 04-1828 5
1103 of this title, or to the debtor’s attorney.” (Emphasis
added.) The revision in § 330(a)(1) dropped the words “or to
the debtor’s attorney,” and the statute now says that a court
may award a “professional person employed under section
327 or 1103” reasonable compensation for actual and
necessary services. The effect was to lump attorneys with
persons who must be employed under § 327 (the relevant
section for our purposes) in order to be compensated for
their services; whereas before the revision they were
exempt from the requirements of § 327. The difference is
significant because § 327 authorizes the trustee to employ
an attorney “with the court’s approval.” The issue then arose
as to whether attorneys could only be compensated out of
the estate if they were approved by the court or whether the
omission of the words “or to the debtor’s attorney” was
inadvertent, causing the statute to be ambiguous and allow-
ing a conclusion that Congress must have meant to continue
to exempt attorneys from the § 327 requirements.
The Supreme Court has recently eliminated any confusion
on this point. In Lamie v. U.S. Trustee, 1245 S. Ct. 1023(2004), the Court determined that the revised § 330 means
what it says and that §§ 327 and 330, taken together, pro-
hibit compensation awards from a Chapter 7 estate to an
attorney unless the attorney is employed as authorized by
§ 327:
[W]e hold that § 330(a)(1) does not authorize compensa-
tion awards to debtors’ attorneys from estate funds,
unless they are employed as authorized by § 327. If the
attorney is to be paid from estate funds under § 330(a)(1)
in a chapter 7 case, he must be employed by the trustee
and approved by the court.
Lamie, 1245 S. Ct. at 1032.
All of which means that the basis for an award of fees in
this case can only come from state law. And on this point,
Illinois law is clear and unhelpful to Weinschneider. Illinois
6 No. 04-1828
follows the American rule, under which attorney fees are
not available unless the parties have agreed to them or a
statute provides for them. In Ritter v. Ritter, 381 Ill. 549,
557, 46 N.E.2d 41, 45 (1943), the Supreme Court of Illinois
stated:
The cases all confirm the rule that attorneys fees and
expenses of litigation can not be recovered in a subse-
quent suit as damages by a successful plaintiff who has
been forced into litigation by reason of the defendant’s
wrongful conduct.
Slightly more recently, the Illinois Appellate Court reaf-
firmed that principle in Child v. Lincoln Enterprises, Inc.,
51 Ill. App. 2d 76, 82, 200 N.E.2d 751, 754 (1964), which,
like the case before us, involved damages for breach of a
covenant not to sue. The court stated:
Attorney fees and the ordinary expenses and burden of
litigation are not allowable to the successful party in
the absence of an agreement or stipulation specifically
authorizing the allowance of attorney fees, or in the ab-
sence of a statute providing for the taxing of attorney
fees against the losing party.
Unfortunately for Weinschneider, the contract in this case
does not contain a provision for attorney fees, nor is there
a statute providing for fees in this situation. His claim for
attorney fees as an administrative expense was properly
denied, and, accordingly, we affirm the judgment of the
district court.
No. 04-1828 7
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—1-18-05