TranSouth Financial Corp. of Florida v. Johnson

• Decision Date: 29 May 1991
• Docket Number: No. 89-4036,89-4036
• Citation: 931 F.2d 1505
• Parties: , 24 Collier Bankr.Cas.2d 1919, 21 Bankr.Ct.Dec. 1210, Bankr. L. Rep. P 74,022 TRANSOUTH FINANCIAL CORPORATION OF FLORIDA, Plaintiff-Appellant, v. Ralph Jennings JOHNSON, Vera Johnson, Defendants-Appellees. Eleventh Circuit
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1505

931 F.2d 1505

59 USLW 2746, 24 Collier Bankr.Cas.2d 1919,

21 Bankr.Ct.Dec. 1210, Bankr. L. Rep. P 74,022

TRANSOUTH FINANCIAL CORPORATION OF FLORIDA, Plaintiff-Appellant, v. Ralph Jennings JOHNSON, Vera Johnson, Defendants-Appellees.

No. 89-4036.

United States Court of Appeals,Eleventh Circuit.

May 29, 1991.

Catherine Peek McEwen, Tampa, Fla., for plaintiff-appellant.

Appeal from the United States District Court for the Middle District of Florida.

Before CLARK and BIRCH, Circuit Judges, and HENDERSON, Senior Circuit Judge.

BIRCH, Circuit Judge:

Appellant TranSouth Financial Corporation of America ("TranSouth") appeals from an order of the United States District Court for the Middle District of Florida (the "District Court"). The District Court refused to award attorney's fees to TranSouth after TranSouth had been granted relief in a dischargeability proceeding pursuant to section 523(a)(2) of the Bankruptcy Code ("Section 523(a)(2)"). The question before this court is whether a creditor successful in a dischargeability proceeding may recover its attorney's fees when such fees are provided for by the contract at issue between the creditor and debtor. We hold that a creditor may recover attorney's fees under these circumstances. Once a debt has been determined nondischargeable, a creditor's attorney's fees, if provided for by contract, are included as part of the nondischargeable debt. We VACATE and REMAND.

I. BACKGROUND

In December, 1985, TranSouth established, in exchange for a promissory note ("the Note"), a revolving line of credit loan for Ralph Jennings Johnson and Vera Johnson ("the Johnsons"). The Note provided that in the event the Johnsons defaulted on the loan payments and TranSouth had to engage attorneys to collect the balance due, the Johnsons would be liable, up to a stated amount, for TranSouth's attorney's fees. The Johnsons subsequently filed a petition in the Bankruptcy Court for an order of relief under Chapter 7 of the Bankruptcy Code.

After the Johnsons filed for bankruptcy, TranSouth initiated an adversary proceeding in the Bankruptcy Court pursuant to Section 523(a)(2). ¹ TranSouth and the Johnsons settled this dispute and filed a "Stipulation For Settlement" ("the Stipulation") with the Bankruptcy Court. The Stipulation provided: (1) TranSouth is a creditor of the Johnsons; (2) TranSouth has incurred costs in this adversary proceeding; (3) judgment should be entered in favor of TranSouth for an amount equal to the principal of the debt, the costs incurred in its collection, interest, and reasonable attorney's fees as provided by the Note; and (4) the debt at issue qualifies as an exception to discharge pursuant to Section 523(a)(2).

Pursuant to the Stipulation, the Bankruptcy Court entered judgment in favor of TranSouth. The judgment allowed TranSouth to collect the principal amount of the debt, as well as the costs incurred in its collection and interest. The Bankruptcy Court also ordered, however, that notwithstanding the terms of the Stipulation and the Note, there was no authority to support an award of attorney's fees in this type of dischargeability proceeding. Thus, TranSouth would not be awarded attorney's fees.

TranSouth appealed to the District Court from the Bankruptcy Court's denial of its request for attorney's fees. Citing the legislative history of Section 523, the District Court affirmed the Bankruptcy Court's order. TranSouth's appeal from the District Court's denial of TranSouth's request for attorney's fees is now before this court.

II. DISCUSSION ²

To determine whether a creditor successful in a discharge action is entitled to attorney's fees, we must analyze the meaning of Section 523. When interpreting a statute, a court's analysis should begin with the actual language of the statute, and should be consistent with the plain meaning of the statutory language. See Bd. of Educ. v. Mergens, --- U.S. ----, ----, 110 S.Ct. 2356, 2364, 110 L.Ed.2d 191 (1990); Mallard v. U.S. District Court, 490 U.S. 296, 300-01, 109 S.Ct. 1814, 1818, 104 L.Ed.2d 318 (1989); In re Davis (Davis v. Davis), 911 F.2d 560, 562 (11th Cir.1990). Thus, we begin by examining the language of Section 523.

Section 523 provides that the Bankruptcy Code will not discharge an individual debtor from any debt that meets the requirements of Section 523. If a creditor is able to establish the requisite elements of Section 523, the creditor is entitled to collect "the whole of any debt" he is owed by the debtor. In re Martin (Martin v. Bank of Germantown), 761 F.2d 1163, 1168 (6th Cir.1985). The Stipulation establishes that the elements of a Section 523 discharge have been met. Thus, our interpretation of the language of Section 523 focuses on the meaning of "debt," and whether the definition of "debt" encompasses a creditor's contractual attorney's fees.

The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. Sec. 101(11). "Claim" is defined as "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. Sec. 101(4)(A). "It is established that 'debt' is to be given a broad and expansive reading for purposes of the Bankruptcy Code." In re Chase & Sanborn Corp. (Nordberg v. Arab Banking Corp.), 904 F.2d 588, 595 (11th Cir.1990). Therefore, the "debt" excused from discharge in a successful Section 523 action would appear to include a debtor's contractual obligation to pay a creditor's attorney's fees.

Our reading of the Bankruptcy Code's plain language is reinforced by the principal that attorney's fees are properly awarded to a creditor prevailing in a bankruptcy claim if there exists a statute or valid contract providing therefor. Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 717, 87 S.Ct. 1404, 1407, 18 L.Ed.2d 475 (1967); In re Martin, 761 F.2d at 1168; Nat Harrison Assoc., Inc. v. Gulf States Utilities Co., 491 F.2d 578, 588-589 (5th Cir.1974). Section 523 does not expressly state that creditors successful in dischargeability proceedings are entitled to recover attorney's fees. ³ Thus, we must examine the enforceability of the provision in the Note entitling TranSouth to recover attorney's fees.

"The construction of [a] contract for attorney's fees presents ... a question of local law." Security Mortgage Co. v. Powers, 278 U.S. 149, 154, 49 S.Ct. 84, 85, 73 L.Ed. 236 (1928); see also In re Martin, 761 F.2d at 1168. The Note clearly and unambiguously provides that the Johnsons would be liable for TranSouth's attorney's fees in the event the Johnsons defaulted and TranSouth had to hire an attorney to collect the balance due on the Note. Florida law validates and enforces such contractual provisions for reasonable attorney's fees. See, e.g., Cheek v. McGowan Elec. Supply Co., 511 So.2d 977 (Fla.1987); Sybert v. Combs, 555 So.2d 1313, 1313-1314 (Fla.Dist.Ct.App.1990).

"One of the primary purposes of the bankruptcy act is to 'relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh....' ... [The bankruptcy act] gives to the honest but unfortunate debtor ... a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934) (quoting Williams v. U.S. Fidelity & Guaranty Co., 236 U.S. 549, 554-555, 35 S.Ct. 289, 290, 59 L.Ed. 713 (1915)); see also Grogan v. Garner, --- U.S. ----, ----, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). To help ensure that a debtor will not lose this protection in the context of a dischargeability proceeding, Section 523(d) provides that a prevailing debtor often will be entitled to recover its attorney's fees and damages from the creditor initiating the proceeding. ⁴ This section is designed to prevent creditors from using the threat of litigation to coerce debtors into settlements in situations where the debtor likely would be entitled to discharge. ⁵ This desire to protect debtors from coercive settlements also explains the absence of a blanket statutory right for a successful creditor to recover attorney's fees.

Allowing TranSouth to recover attorney's fees under the circumstances of this case will not contravene the "fresh start" policy of the Bankruptcy Code, which was designed to protect the honest debtor. The debtor attempting to abuse the proceedings of bankruptcy is not entitled to the complete medley of Bankruptcy Code protections. The Bankruptcy Code thereby attempts to discourage such abuse. "Fraudulent conduct is best discouraged, not only by denying discharge, but also by ... [recognizing that] the creditor who has been defrauded is entitled to all of its rights under the contract, including reasonable attorney fees." In re Sears (Pacific Bancorporation v. Sears), 102 B.R. 781, 785 (Bankr.S.D.Cal.1989) (quoting Chase Manhattan Bank v. Birkland, 98 B.R. 35, 37 (Bankr.W.D.Wash.1988)).

The protective policy of Section 523(d) will not be weakened by enforcement of the Note's attorney's fee provision. There are several sections in the Bankruptcy Code which are designed to ensure that a debtor in a dischargeability proceeding will not be unfairly disadvantaged. First, Section 523(d) itself allows an honest debtor to defend against a dischargeability action without regard to the cost of attorney's fees. Second, a creditor seeking an exception to discharge carries a substantial burden, having to prove that the debtor's conduct meets all of the requirements of a Section 523 discharge. In re Crosslin, 14 B.R. 656, 658 (Bankr.M.D.Tenn.1981). This is made more difficult because exceptions to discharge are strictly construed by the courts. See Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915). Third, Section 524(c)-(d) establishes an exhaustive, court...