In re Sean L. Dinan And Stacey M. Dinan, BAP No. NV–10–1298–KiDH.

• Decision Date: 22 April 2011
• Docket Number: Bankruptcy No. 07–50089.,BAP No. NV–10–1298–KiDH.,Adversary No. 07–05073.
• Citation: 11 Cal. Daily Op. Serv. 5645,2011 Daily Journal D.A.R. 6733,448 B.R. 775
• Parties: In re Sean L. DINAN and Stacey M. Dinan, Debtors.Harry C. Fry, Appellant,v.Sean L. Dinan; Stacey M. Dinan, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

448 B.R. 775

11 Cal. Daily Op. Serv. 5645

2011 Daily Journal D.A.R. 6733

In re Sean L. DINAN and Stacey M. Dinan, Debtors.Harry C. Fry, Appellant,

v.Sean L. Dinan; Stacey M. Dinan, Appellees.

BAP No. NV–10–1298–KiDH.

Bankruptcy No. 07–50089.

Adversary No. 07–05073.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on Feb. 18, 2011.Decided April 22, 2011.

Carole Marie Pope argued for appellant, Harry Fry.

Christopher Burke argued for appellees, Sean and Stacey Dinan.Before: KIRSCHER, DUNN, and HOLLOWELL, Bankruptcy Judges.

OPINION

KIRSCHER, Bankruptcy Judge.

In this appeal, we address an issue of first impression in this or any other circuit: whether an award of attorney's fees and/or costs in connection with a judgment under 11 U.S.C. § 523(a)(14) ¹ is nondischargeable. We conclude that it is.

Appellant, Dr. Harry C. Fry (“Fry”), appeals an order from the bankruptcy court awarding Fry attorney's fees and costs in connection with a denial of discharge and nondischargeability action he prosecuted against appellees-debtors, Sean L. Dinan (“Sean”) and Stacey M. Dinan (“Stacey”) (collectively “Dinans”). We AFFIRM the costs award. However, we VACATE the attorney's fee award and REMAND that issue to the bankruptcy court for a reasonableness determination under Nevada law.

I. FACTS AND PROCEDURAL BACKGROUND

A. Factual Background.

On or around October 10, 2003, Fry loaned Dinans $165,000 for their sole proprietorship, Terra Firma, as evidenced by a written Agreement to Loan Money and Promissory Note (“Loan”). The Promissory Note includes an acceleration clause which states that “the entire sum of principal and interest, including guaranteed interest, then unpaid, plus any prepayment penalties,” would become due and payable upon either party filing bankruptcy. The Promissory Note also includes an attorney's fees clause:

Each maker agrees to pay all costs and expenses incurred in enforcing collection of any portion of this note by suit or otherwise, including a reasonable attorney's fee, if an attorney is used in such collection. If suit is instituted for collection, the Court shall adjudge the attorney's fee allowed.

In exchange for the Loan, Dinans gave Fry a security interest in various construction equipment and vehicles used in their business. Fry perfected his security interest in the equipment and vehicles by filing a UCC–1 Statement with the Nevada Secretary of State.

The Dinans eventually defaulted on the Loan in August 2005. On or around July 10, 2006, Fry sent Dinans a letter informing them of their default of 12 months and that he was commencing foreclosure proceedings per the Loan. Fry requested that Dinans turn over the equipment and vehicles given as security so that he could take possession of them. About one month later, on August 4, 2006, Fry sent Dinans a follow-up letter stating that he would soon be selling the equipment and vehicles, about which Dinans would receive notice, but that certain items given as collateral had not yet been turned over to Fry. Fry asked Dinans to turn over the missing items and/or any proceeds they received if they had sold any of these items.

On October 6, 2006, Fry caused to be published in the Reno Gazette–Journal a Notification of Disposition of Collateral (“Notice of Sale”). On that same date, Fry sent Dinans a certified copy of the Notice of Sale. On October 21, 2006, Fry held an auction for the equipment and vehicles. Four vehicles were sold for a total of $12,550. Fry later sold some other pieces of equipment; a few smaller items Fry repossessed were stolen. Fry attempted to conduct another auction for the remaining items, but no auction company was interested in holding the sale because of the items' poor condition. Ultimately, Fry realized about $16,000 in selling the collateral, which included a credit for the stolen items.

In January 2007 Fry filed a collection action against Dinans in state court, but the case was stayed once Dinans filed a voluntary chapter 7 petition for relief on February 1, 2007.

B. Procedural History.1. Proceedings for Fry's Denial of Discharge and Nondischargeability Actions.

On May 7, 2007, Fry filed a complaint seeking to deny Dinans a discharge under sections 727(a)(2)(a), (a)(4), and (a)(5), and to determine the Loan as a nondischargeable debt under sections 523(a)(2) and (a)(4).² Fry later amended his two nondischargeability claims for one claim under section 523(a)(14).³ Fry alleged that the Loan was nondischargeable because Dinans had used the proceeds to pay outstanding 940 and 941 payroll taxes owed to the IRS. In their answer, Dinans denied all of Fry's allegations, specifically denying that the Loan was used to pay taxes owed to the IRS.

In his pretrial brief, Fry contended that Dinans' outstanding payroll tax debt was at least $104,861.83 according to a September 3, 2003 balance sheet for Terra Firma. Fry contended that Dinans needed the Loan to pay this amount to stay in business, and it was for this purpose that Fry made the Loan. Fry further contended that the total deficiency owed to him by Dinans was $193,477.36, which included the unpaid principal, interest, late charges, an advance of $1,500, and a $16,000 credit for monies Fry realized in selling the collateral.

Dinans conceded that the total deficiency owed to Fry was $193,477.36, but contended that they were not obligated to pay it because Fry failed to give proper notice of the sale of the collateral under Nev.Rev.Stat. § 482.516. ⁴ Therefore, Dinans asserted that because Fry had no enforceable claim, he had no standing to bring a nondischargeability action against them.

The bankruptcy court held a one-day trial on Fry's claims on January 13, 2010. At the start of trial, the parties moved to admit Exhibit # 1—written factual stipulations the parties agreed upon the night before. In the stipulation, Dinans conceded the following facts:

• Dinans represented to Fry that they would use the Loan proceeds in part for paying outstanding payroll taxes to the IRS;

• Dinans deposited the $165,000 proceeds into their bank account on October 13;

• on October 13, Dinans' bank account reflected a deficit of $32,193.22;

• between October 13, 2003 and October 30, 2003, Dinans made deposits into their account from other sources which totaled $113,106.88;

• between October 13, 2003 and October 30, 2003, checks and other withdrawals from Dinans' bank account totaled $115,738.77;

• on October 30, 2003, Dinans paid the IRS $107,001.32 with two checks, one for $62,506.08 and the other for $44,495.24.

The bankruptcy court announced orally its decision in favor of Dinans on the section 727 claims. However, it reserved ruling on the nondischargeability claim and requested that the parties submit further briefing about the Notice of Sale under Nevada law.

In his post-trial brief, Fry contended that Nev.Rev.Stat. § 104.9613 ⁵ applied in this case because it governs the disposition of collateral under the UCC; i.e., selling pieces of equipment and vehicles given as security for a loan to a business. Contrary to Dinans' position, Fry argued that Nev.Rev.Stat. § 482.516 applied only to sellers or lessors selling a consumer's repossessed vehicle. Finally, Fry contended that per the terms of the Promissory Note he was entitled to attorney's fees.

Dinans argued that only two issues remained to be decided: what portion of the Loan proceeds went to pay taxes, and whether Fry's Notice of Sale violated Nevada law. Dinans asserted that because of the subsequent withdrawals they made on their account before they paid the IRS on October 30, but after depositing the Loan proceeds on October 13, only a portion of the $107,001.32 could be traced to the IRS payments based on a first-in first-out (“FIFO”) accounting approach. Hence, only $17,068.01 could be traced to the IRS, and only that amount would be nondischargeable, presuming Fry's Notice of Sale complied with Nevada law, which Dinans disputed.

If Nev.Rev.Stat. § 104.9613 applied, the parties agreed that Fry's Notice of Sale was sufficient and he would be entitled to a nondischargeable deficiency judgment. Conversely, if Nev.Rev.Stat. § 482.516 applied, the parties agreed that Fry's Notice of Sale was not sufficient and his claim failed.

On March 1, 2010, the bankruptcy court issued its Findings of Fact, Conclusions of Law and Order. The court rejected Dinans' tracing and FIFO theories and determined that their payments to the IRS totaling $107,001.32 represented a nondischargeable obligation to Fry under section 523(a)(14). ⁶ However, the court agreed with Dinans that Nev.Rev.Stat. § 482.516 applied. Accordingly, Fry's Notice of Sale was insufficient, he was considered paid in full, and his deficiency claim was barred. The court entered a judgment in favor of Dinans on March 4, 2010, dismissing the adversary proceeding.

Fry moved to alter or amend the March 4 judgment (“Rule 9023 Motion”), contending that the bankruptcy court misapplied Nevada law; legislative history showed that § 482.516 did not apply in this case. Therefore, contended Fry, his Notice of Sale was proper under § 104.9613, and he was entitled to a nondischargeable judgment under section 523(a)(14) for $107,001.32. Dinans opposed the Rule 9023 Motion.

The bankruptcy court entered an order on Fry's Rule 9023 Motion on April 14, 2010. The court reversed its decision and concluded that Nev.Rev.Stat. § 104.9613 applied; therefore, Fry's Notice of Sale was proper and he was entitled to a deficiency. However, even though Dinans made no request for relief from the March 4 judgment, the court reversed itself and accepted Dinans' tracing and FIFO theories. As a result, Fry was entitled to a nondischargeable judgment under section 523(a)(14), but only for $17,068.01. On April 26, 2010, the bankruptcy court entered an amended judgment memorializing its decision set forth in the April 14 order.

2. Proceedings for Fry's Attorney's Fees and Costs.

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