In re Palermo, Case No. 05-25081 (ASH) (Bankr. S.D.N.Y. 12/3/2007)

• Decision Date: 03 December 2007
• Docket Number: Case No. 05-25081 (ASH).,Adv. Pro. No. 06-8285.
• Parties: In re: Douglas E. Palermo, Chapter 7, Debtor. Doubet, LLC, Plaintiff, v. Douglas E. Palermo, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

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In re: Douglas E. Palermo, Chapter 7, Debtor Doubet, LLC, Plaintiff, v. Douglas E. Palermo, Defendant.

Case No. 05-25081 (ASH).

Adv. Pro. No. 06-8285.

United States Bankruptcy Court, S.D. New York.

December 3, 2007.

LOWENSTEIN SANDLER PC, Attorneys for Plaintiff Doubet, LLC, Bruce Buechler, Esq., S. Jason Teele, Esq., New York, NY.

COLE, SCHOTZ, MEISEL, FORMAN & LEONARD, P.A., Attorneys for Debtor and Defendant Douglas E. Palermo, Laurence May, Nolan E. Shanahan, New York, NY.

ADLAI HARDIN, JR., Bankruptcy Judge.

DECISION ON ATTORNEYS' FEES AND COSTS

Doubet, LLC ("Doubet") seeks entry of an order awarding it reasonable attorneys' fees and costs incurred in connection with the prosecution of this adversary proceeding. After conducting a trial, the court entered its Decision After Trial denying the Debtor a discharge. An Order and Judgment denying the Debtor a discharge was entered by the Court on July 16, 2007. For the following reasons Doubet's request for attorneys' fees is denied and costs approved.

Jurisdiction

This Court has jurisdiction over this core proceeding under 28 U.S.C. §§ 1334(a) and 157(a) and (b) and the standing order of referral to bankruptcy judges dated July 10, 1984, signed by Acting Chief Judge Robert J. Ward.

Background

This decision presumes familiarity with the facts as stated in this Court's prior decision at Doubet, LLC v. Palermo(In re Palermo), 370 B.R. 599 (Bankr. S.D.N.Y. 2007).

Discussion

Doubet requests the Court to enter an Order granting it reasonable attorneys' fees and costs incurred in prosecuting this adversary proceeding. Doubet seeks attorneys' fees in the amount of $735,826.00 and costs in the amount of $77,535.25 for a total of $813,361.25. Doubet bases his request upon exceptions to the American Rule concerning litigants' expenses, Federal Rules of Bankruptcy Procedure 7054(b) and 7008(b) and Federal Rule of Civil Procedure 9(g).

Federal Rule of Bankruptcy Procedure 7054(b) provides in pertinent part:

(b) COSTS. The court may allow costs to the prevailing party except when a statute of the United States or these rules otherwise provides.

Federal Rule of Bankruptcy Procedure 7008(b) provides:

ATTORNEY'S FEES. A request for an award of attorney's fees shall be pleaded as a claim in a complaint, cross-claim, third-arty complaint, answer or reply as may be appropriate."

Federal Rule of Bankruptcy Procedure 7009 applies Federal Rule of Civil Procedure 9(g) to adversary proceedings which provides that "[w]hen items of special damage are claimed, they shall be specifically stated."

I. The American Rule

Under the American Rule regarding litigants' expenses, the prevailing party is not ordinarily entitled to attorneys' fees unless certain limited exceptions apply. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247 (1975); Fleischmann Distill. Corp. v. Maier Brewing Co., 386 U.S. 714, 717 (1967).

Courts have developed several exceptions to the American Rule. In general, federal courts may award attorneys' fees under one of the following exceptions: (1) a contract provides for payment of attorneys' fees; (2) a statute provides an allowance of attorneys' fees; (3) a recovered fund or property confers a "common benefit," as in a class action suit; (4) a party willfully disobeys a court order; or (5) a court finds that the losing party has acted "in bad faith, vexatiously, wantonly or for oppressive reasons." Cityside Archives, Ltd. v. New York City Health and Hosp. Corp., 37 F. Supp.2d 652, 656-657 (D.N.J. 1999), citing Skehan v. Board of Trustees of Bloomsburg State College, et al., 538 F.2d 53, 56 (3d Cir. 1976), cert. denied, 429 U.S. 979 (1976), remanded to 431 F. Supp. 1379 (M.D.Pa. 1977), aff'd, 590 F.2d 470 (3^rd Cir. 1978), cert. denied, 444 U.S. 832 (1979), remanded to 501 F. Supp. 1360 (M.D.Pa. 1980). See also In re M & M Transp. Co., 1983 WL 2121, *1 (S.D.N.Y. 1983) ("However, where a party has acted in bad faith either in filing an action or in its conduct of the litigation, an award of counsel fees is appropriate.") (citation omitted).

Essentially Doubet claims that it is entitled to attorneys' fees and costs pursuant to two exceptions to the American Rule where: (1) a contract provides for payment of attorneys' fees and (2) a court finds that a party has acted in bad faith, vexatiously, wantonly or for oppressive reasons.

Doubet argues that it is entitled to its attorney's fees under the exceptions to the American Rule by virtue of Palermo's litigation tactics in this adversary proceeding, his filings in Court concerning South Boston, River East and the MLL/XE transaction, and the errors and omissions in his statements and schedules filed with the Court. Doubet contends that Palermo had a single objective: to perpetrate fraud against Doubet and his bankruptcy estate which was evidenced by his lack of honest disclosure in his statements, schedules, trial tactics and arguments, the fact that 13 people were necessarily deposed (in NY, Miami, etc.), and tens of thousands of pages of discovery to reconstruct books and records needed review.

In opposition, Palermo contends that since he has filed an appeal, Doubet's request is premature and that none of exceptions to American Rule apply in this case.

II. A. Contractual Exception

It is well settled law that reasonable attorneys fees and costs may be awarded to a prevailing party if the contract that governed the relationship between the parties provided for the same. See Aleyska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 257(1975). The parties do not dispute that the contractual provisions are to be strictly construed.

B. Merger Doctrine

The parties do not dispute that under well-settled New York law, all claims or causes of action are merged into a subsequent judgment. "Where a cause of action has been prosecuted or reduced to judgment, the cause of action is swallowed up and merged in the judgment." In re Whitney & Kitchen, 146 A.D. 45, 130 N.Y.S. 629, 631 (1^st Dept. 1911). See also, Chase Manhattan Bank v. Brown & East Ridge Partners, 243 A.D.2d 81, 83-84, 672 N.Y.S.2d 206 (4^th Dept. 1998) ("`[a] cause of action is merged in a judgment rendered'") (internal citation omitted); Kostopoulos v. Asturia Shipping Co., 467 F.2d 91, 95 (2d Cir. 1972) ("Once a claim is reduced to a judgment, the original claim is extinguished and merged into the judgment"). Accordingly, Doubet may not rely on provisions of notes and guaranty.

While the notes and guaranty allow for attorneys' fees "incurred by the holder in connection with the enforcement of the obligations under this Note" (Doubet's Motion Ex. A), each of the judgments explicitly prohibits the recovery of attorneys' fees. The $72,752.03 judgment indicates "in the event of default judgment [is] entered, plaintiff waives attorneys fees;" the $120,267.75 judgment indicates "in the even default is entered, plaintiff waives attorney fees;" and the $1,017,206.38 judgment indicates "in the event of default is entered, plaintiff agrees to waive attorney fees." (See Defendant's Opposition Ex. 1). Accordingly, it appears that up to the date of the judgments, Palermo is not entitled to attorneys' fees. With respect to activity thereafter, the following discussion applies.

III. The Bad Faith Exception

Doubet argues that it is entitled to reasonable attorneys' fees and costs under the "bad faith" exception to the American Rule based upon the argument that Palermo's litigation tactics in this adversary proceeding, the Columbia-455 Central Park West transaction, his filings in court regarding South Boston, River East and the MLL/XE transaction and the errors and omissions in his statements and schedules filed with this Court were conceived with a single purpose: to cover the frauds he perpetrated against Doubet and his bankruptcy estate. In essence Doubet urges the Court to base its award/sanction upon activity over the entire time line of events pre-litigation through post-bankruptcy filing including the course of the instant adversary proceeding pointing to Chambers v. Nasco, Inc., 501 U.S. 32 (1991), reh'g denied, 501 U.S. 1269; Hall v. Cole, 412 U.S. 1 (1973); Vaughan v. Atkinson, 369 U.S. 527 (1962), reh'g denied, 370 U.S. 965 (1962), on remand to, 206 F.Supp. 575 (E.D.Va. 1962); and Sierra Club v. U.S. Army Corps of Engineers, 776 F.2d 383, 390 (2d Cir. 1985) for support.

While in Chambers v. Nasco, the majority recognized a court's power to sanction conduct before other tribunals, its application appears limited. Specifically, the majority found that Chamber's "attempt to gain the FCC's permission to build a new transmission tower was in direct contravention of the District Court's orders to maintain the status quo pending the outcome of the litigation and was therefore within the scope of the District Court's sanctioning power." Id. at 57. However, in declining to express an opinion as to whether the District Court would have had the inherent power to sanction Chambers for conduct relating to the underlying breach of contract, the majority noted that "substantive state policy was not implicated here, where sanctions were imposed for conduct during the litigation." Id. at 54-55 (emphasis supplied). Doubet's suggestion that Chambers v. Nasco, 501 U.S. at 46 supports the proposition stated in Hall v. Cole, 412 U.S. 1, 15 (1973) that "[i]t is clear, however that `bad faith' may be found not only in the actions that led to the lawsuit, but also in the conduct of the litigation," is also misplaced. Chambers v. Nasco, 32 U.S. at 46, the page referred to by Doubet, simply cites to Hall v. Cole for support in listing the exception to the American Rule that "a court may assess attorney's fees when a party has `"acted in bad faith, vexatiously, wantonly, or for oppressive reasons."'" (internal citations omitted). As the Sierra Club v. U.S. Army Corps of Engineers, supra, case is not specifically referred to in Chambers v. Nasco, s...