Coatings v. Johnson (In re Johnson)

• Decision Date: 11 January 2013
• Docket Number: Bankruptcy No. 11–27660 EEB.,Adversary No. 11–1505 EEB.
• Parties: In re Steven JOHNSON, Melody Johnson, Debtors. Advanced Coatings, International, Inc., Plaintiffs, v. Steven Johnson and Melody Johnson, Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

485 B.R. 642

In re Steven JOHNSON, Melody Johnson, Debtors.
Advanced Coatings, International, Inc., Plaintiffs,
v.
Steven Johnson and Melody Johnson, Defendants.

Bankruptcy No. 11–27660 EEB.
Adversary No. 11–1505 EEB.

United States Bankruptcy Court,
D. Colorado.

Jan. 11, 2013.

Preempted

West's C.R.S.A. § 13–17–102

[485 B.R. 644]

Dimitri Adloff, J. Thomas MacDonald, Denver, CO, Robert M. Stefancin, Ice Miller, LLP, Cleveland, OH, for Plaintiff.

Steven G. Francis, Fort Collins, CO, for Defendant.

ORDER DENYING DEBTORS' REQUEST FOR ATTORNEY'S FEES PURSUANT TO COLO. REV. STAT. § 13–17–102
ELIZABETH E. BROWN, Bankruptcy Judge.

THIS MATTER comes before the Court on the Defendants' request for attorney's fees under Colo.Rev.Stat. § 13–17–102, a state statute which imposes fees for the assertion of a claim or defense that lacks “substantial justification.” Before conducting an evidentiary hearing on whether Plaintiff's assertion and continued prosecution of claims against the Debtors was substantially justified, the parties have requested a prior determination as to whether this state statute is applicable in a nondischargeability proceeding under 11 U.S.C. § 523. Having reviewed their briefs and applicable law, the Court concludes that this state statute is not applicable to a determination of nondischargeability under the Erie doctrine, and that it has been preempted by Fed. R. Bankr.P. 9011.

I. Background

Plaintiff Advance Coatings International, Inc. (“ACI”) initiated this adversary proceeding by alleging claims under 11 U.S.C. §§ 523(a)(2), (a)(4) and (a)(6) against Debtors Steven and Melody Johnson. At the beginning of trial, ACI orally moved to dismiss its claims against Mrs. Johnson and this Court granted its request. At that time, Debtors' counsel reserved the right to seek sanctions against ACI for its failure to earlier dismiss its claims against Mrs. Johnson.

In written closing argument, the Debtors requested an award of attorney's fees based on ACI's assertion of allegedly groundless claims against both Debtors. They based their request for an award of attorney's fees on three grounds: (1) Fed. R. Bankr.P. 9011; (2) 28 U.S.C. § 1927; and (3) Colo.Rev.Stat. § 13–17–102. The Court subsequently issued orders denying all of ACI's § 523(a) claims, and denying Debtors' request for fees under Rule 9011 and 28 U.S.C. § 1927. The Court requested briefs from the parties on the remaining claim for fees under Colo.Rev.Stat. § 13–17–102.

[485 B.R. 645]

II. DiscussionA. Colo.Rev.Stat. § 13–17–102 and the Erie Doctrine

In relevant part, Colo.Rev.Stat. § 13–17–102 provides that:

[I]n any civil action of any nature commenced or appealed in any court of record in this state, the court shall award, by way of judgment or separate order, reasonable attorney fees against any attorney or party who has brought or defended a civil action, either in whole or in part, that the court determines lacked substantial justification.

Colo.Rev.Stat. § 13–17–102(2). Debtors argue the statute should apply because bankruptcy courts frequently apply state law and because this case in particular involved “state law issues viewed through the prism of the Bankruptcy Code.” Debtors' Reply at 3. ACI argues that § 13–17–102 does not apply because this Court is exercising federal question jurisdiction in this proceeding, thus making state law inapplicable.

The seminal case concerning applicability of state law in federal court is Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) (“Erie”). The Erie case interpreted the Rules of Decision Act, which provides that: “The laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply.” 28 U.S.C. § 1652. The oft stated holding of Erie is that, in diversity cases, federal courts “apply state substantive law and federal procedural law.” Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996). Although often applied in the context of a diversity case, the principles of the Erie case have wider application. As one court described, “the Erie doctrine applies, whatever the ground for federal jurisdiction, to any issue or claim which has its source in state law” and, likewise, “the Erie doctrine is inapplicable to claims or issues created and governed by federal law, even if the jurisdiction of the federal court rests on diversity of citizenship.” Maternally Yours, Inc. v. Your Maternity Shop, Inc., 234 F.2d 538, 541 n. 1 (2d Cir.1956).

The Tenth Circuit has applied the Erie doctrine to determine the applicability of various types of state attorney's fees statutes in diversity actions and actions involving pendant state law claims. In so doing, the Tenth Circuit examines whether the statute is procedural or substantive. If the statute is procedural, federal law applies, but if it is substantive, then the court applies state law. Scottsdale Ins. Co. v. Tolliver, 636 F.3d 1273, 1279 (10th Cir.2011). As noted by the Tenth Circuit, “[s]ubstantive fees are those which are tied to the outcome of the litigation, whereas procedural fees are generally based on a litigant's bad faith conduct in litigation.” Id. (internal citations and quotations omitted). The key distinction is whether the fee shifting is “a matter of substantive remedy, or of vindicating federal judicial authority.” Id. at 1279–80 (internal citations and quotations omitted).

The Tenth Circuit also examines the related issue of whether the state statute at issue “collides with any federal procedural rule” or, in other words, whether the scope of a federal rule is “sufficiently broad to cause a direct collision with the state law or, implicitly, to control the issue before the court.” Id. at 1276–77 (internal citations and quotations omitted). If there is such a conflict, then there is “no room for the operation of the state law,” and the federal rule applies. Id. at 1277;see also

[485 B.R. 646]

Hanna v. Plumer, 380 U.S. 460, 470, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965) (stating that Erie “has never been invoked to void a Federal Rule.”). Only where the state statute and the federal rule “can exist side by side, ... each controlling its own intended sphere of coverage without conflict,” does a federal court apply the state statute. Trierweiler v. Croxton & Trench Holding Corp., 90 F.3d 1523, 1540 (10th Cir.1996) (citing Walker v. Armco Steel Corp., 446 U.S. 740, 752, 100 S.Ct. 1978, 64 L.Ed.2d 659 (1980)). “For purposes of determining whether state and federal rules collide, federal courts have consistently interpreted the federal rules ‘with sensitivity to important state interests and regulatory policies.’ ” Id. (citing Gasperini v. Center for Humanities, 518 U.S. 415, n. 7, 116 S.Ct. 2211, 135 L.Ed.2d 659(1996)).

Under these principles, some federal courts in this district have held that § 13–17–102 is not applicable when the case involves solely federal causes of action. E.g., Wolf v. Petrock, 2010 WL 2232353, at *2 (D.Colo. June 2, 2010) (“[S]tate laws, however, have no applicability to federal claims brought in federal court.”). Other courts, however, have applied this state statute, without any Erie-type analysis and with little or no discussion. See, e.g., Lorillard Tobacco Co. v. Engida, 611 F.3d 1209, 1217 (10th Cir.2010). In Lorillard, the Tenth Circuit held that § 13–17–102 was applicable in a case involving federal and pendant state law claims. Id. The Lorillard decision, however, does not mention Erie or otherwise discuss its principles and, thus, it is unlikely that the issue was raised by the parties. It is also worth noting that the Lorillard decision refers to the case of Harrison v. Luse, 760 F.Supp. 1394, 1400 (D.Colo.1991), aff'd,951 F.2d 1259, 1991 WL 270031 (10th Cir. Dec. 16, 1991), for the proposition that § 13–17–102 “clearly may apply to claims brought in the District of Colorado.” ¹Id. Whether, and to what extent, these cases apply in bankruptcy is unclear. Neither this Court nor the parties have been able to locate any reported decisions considering the...