In re Poli, Bankruptcy No. 00-13723-RGM.

• Decision Date: 30 May 2003
• Docket Number: Adversary No. 01-1050.,Bankruptcy No. 00-13723-RGM.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re David Reginald POLI and Jane Auby Poli, Debtors. Marvin Q. Sanner, Plaintiff, v. David Reginald Poli and Jane Auby Poli, Defendants.

298 B.R. 557

In re David Reginald POLI and Jane Auby Poli, Debtors Marvin Q. Sanner, Plaintiff, v. David Reginald Poli and Jane Auby Poli, Defendants.

Bankruptcy No. 00-13723-RGM.

Adversary No. 01-1050.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

May 30, 2003.

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Malcolm M. Mitchell, Jr., Vorys, Sater, Seymour and Pease, LLP, Alexandria, VA, for plaintiff.

Spencer D. Ault, Young & Ault, Leesburg, VA, for debtors.

James W. Reynolds, Odin, Feldman & Pittleman, Fairfax, VA, for trustee.

MEMORANDUM OPINION

ROBERT G. MAYER, Bankruptcy Judge.

Marvin Q. Sanner filed a complaint alleging that David R. Poli and Jane A. Poli breached a real estate sales contract and that they should be denied their discharge. Motions for summary judgment were granted denying the debtors their discharges and finding that they breached the real estate sales contract. At a further hearing, Sanner proved his damages in the amount of $105,335.44. He also sought in prejudgment interest, $168,698.83 in attorney's fees and $10,126.89 in costs. The court requested briefs as to the prejudgment interest, attorney's fees and costs.

I. Prejudgment Interest

A. Choice of Law

The issues presented first require the determination of the appropriate law to be applied and whether the additional relief requested are matters of substantive law or matters of procedure. A federal court sitting in a diversity case applies the choice of law rules of the forum state. Klaxon Co. v. Stentor Electric Mfg. Co., Inc., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941); Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). This rule extends to bankruptcy courts which are often presented with situations where the Bankruptcy Code incorporates issues that are the subject of state law. When faced with this issue — whether state or federal law applies in a bankruptcy context — the Fourth Circuit held that "in the absence of a compelling federal interest which dictates otherwise, the Klaxon rule, should prevail where a federal bankruptcy court seeks to determine the extent of a debtor's property interest." In re Merritt Dredging Company, Inc., 839 F.2d 203, 206 (4th Cir.1988). Applying these principles, the bankruptcy court must apply the choice of law rules of the forum state, here Virginia, to determine which state law applies to the issue of prejudgment interest.

Virginia choice of law rules establish Pennsylvania law as governing law. The Virginia Supreme Court summarized the rule in Arkla Lumber & Mfg. Co. v. West Virginia Timber Co., 146 Va. 641, 650, 132 S.E. 840, 842 (1926) by quoting Minor's Conflict of Laws, § 155:

Everything relating to the making of the contract is to be governed by the law of the place where it was made; everything relating to the performance of the contract is to be controlled by the law of the place of performance.

(emphasis in original). This remains the rule in Virginia. Equitable Trust Company v. Bratwursthaus Management Corporation, 514 F.2d 565 (4th Cir.1975) (holding that under Virginia law the place of performance governs questions arising in connection with the performance of a contract); Madaus v. November Hill Farm, Inc., 630 F.Supp. 1246 (W.D.Va.1986); Occidental Fire & Cas. Co. v. Bankers & Shippers Ins. Co., 564 F.Supp. 1501 (W.D.Va.1983). A contract breach is a performance issue and is governed by the law of the place of performance. Sneed v. American Bank Stationary Co., 764 F.Supp. 65, 67 (W.D.Va.1991). The contract in this case was for the purchase of real property situate in Pennsylvania. Closing was to have occurred in Pennsylvania. The failure to close constituted a breach of the contract and is a performance issue. Consequently, Pennsylvania law governs. The same result would follow if this were an issue relating to the making of the contract. A contract is made where the last act necessary to create a binding contract taken. While the evidence is not entirely clear as to where the contract was last executed, it does reflect that the Polis executed it first on August 30, 1997, and that Sanner as the seller accepted it without alteration the following day. Sanner's address recited in the contract was the property address. The property is a single family residence. It is reasonable to conclude that Sanner lived in Pennsylvania, was the last party to execute the contract and executed the contract in Pennsylvania.

B. Application of Pennsylvania Substantive Law

Prejudgment interest is a substantive component of contract damages under Pennsylvania law. See Kroblin Refrigerated Xpress, Inc. v. Pitterich, 805 F.2d 96, 109 (3d Cir.1986). In breach of contract cases, prejudgment interest is a matter of right, calculated from the time the money became due or payable. Francisco v. United States, 267 F.3d 303, 308 (3d Cir.2001); Gold & Co., Inc. v. Northeast Theater Corp., 281 Pa.Super. 69, 76, 421 A.2d 1151, 1154 (Pa.Super.1980)("In a contract action the award of such interest does not depend upon discretion but is a legal right."). Interest on the whole amount due accrues at the time tender was due. See Gold & Co., 281 Pa.Super. at 77, 421 A.2d at 1155. The purpose of prejudgment interest is to compensate plaintiffs for the loss sustained by not having received the entitled amount at the time that it should have been received. Such an award places the plaintiff in the position he would have occupied had the party at fault fulfilled its contractual obligation. Girard Bank v. John Hancock Mut. Life Ins. Co., 524 F.Supp. 884, 897 (E.D.Pa.1981) (allowing prejudgment interest at the legal rate from the date the payment is wrongfully withheld where the damages are liquidated and certain and the interest is readily ascertainable through computation).¹

Pennsylvania law provides for payment of interest pursuant to 41 Pa.Stat. § 202, which applies a 6% rate to contract matters where parties have not specified another rate and where prejudgment interest is awarded. Carroll v. City of Philadelphia, Board of Pensions and Retirement Municipal Pension Fund, 735 A.2d 141, 146-47 (Pa.Cmwlth.1999).

The settlement date was to have been November 30, 1997. Sanner would have netted from the closing, after the real estate commissions and other costs, $1,057,524.50. This amount must be credited with payments that Sanner received when he later sold the personal property and the real estate. Sanner sold the personal property at auction and received $15,457.00 about February 20, 1998, and $8,950.25 on May 28, 1998. The second contract for the sale of the real estate closed on December 11, 1998. Consequently, prejudgment interest will be awarded at a rate of 6% on $1,057,524.50 from November 30, 1997, through February 20, 1998; on $1,042,067.50 from February 21, 1998, through May 28, 1998; on $1,033,117.25 from May 29, 1998, through December 11, 1998; and on $105,335.44 from December 12, 1998, through May 29, 2003, the date of judgment. The total amount of prejudgment interest is $92,550.97.

II. Postjudgment Interest

The question whether postjudgment interest is substantive or procedural is settled law. The Fourth Circuit held that postjudgment interest is procedural, rather than substantive. In diversity actions federal law, rather than state law, governs an award of postjudgment interest. Forest Sales Corp. v. Bedingfield, 881 F.2d 111, 113 (4th Cir.1989). Because postjudgment interest is procedural rather than substantive law, the federal judgment rate as set forth in 28 U.S.C. § 1961 applies to postjudgment interest awards in the bankruptcy context.

III. Attorney Fees

Sanner requested an award of attorney's fees of $13,510.00 for pre-bankruptcy work and $155,188.83 for post-bankruptcy work. The sales contract between Sanner and the Polis contained no provision for attorney fees. The generally applicable American rule is that absent a contractual or statutory provision to the contrary, a prevailing party is not entitled to recover attorney fees from the losing party. Hitachi Credit America Corp. v. Signet Bank, 166 F.3d 614, 631 (4th Cir.1999); Merlino v. Delaware County, 556 Pa. 422, 425, 728 A.2d 949, 951 (1999) ("[T]here can be no recovery of attorneys' fees from an adverse party, absent an express statutory authorization, a clear agreement by the parties or some other established exception."); Mullins v. Richlands Nat'l Bank, 241 Va. 447, 449, 403 S.E.2d 334, 335 (1991). Sanner sets forth three alternative arguments for recovery of his attorney fees: (1) the court should follow the rule set forth in Hiss v. Friedberg, 201 Va. 572, 112 S.E.2d 871 (1960); (2) the court should impose sanctions under 42 Pa.Stat. § 2503(7), (9), F.R.Bank.P. 9011 or F.R.Bank.P. 7056; or (3) the court should award attorney's fee because Sanner conferred a benefit on the estate.

A. Hiss v. Friedberg

Sanner urges the court to follow the exception to the rule general rule of Mullins v. Richlands Nat'l Bank as set forth in Hiss v. Friedberg, a Virginia Supreme Court decision. It holds that an award of attorney's fees is proper when, as a result of defendant's breach of contract, expenses of collateral litigation are incurred with a third party provided that the employment of counsel is a direct and necessary consequence of the defendant's breach of contract. Hiss, 201 Va. at 577-78, 112 S.E.2d at 875-76. However, "The rule just stated does not deal with the cost of litigation with the defendant himself." Hiss, 201 Va. at 578, 112 S.E.2d at 876.

There are two problems with Sanner's argument. First, if Hiss is considered a substantive rule of law because it determines the manner in which damages are calculated in a breach of contract case and the extent of the damages, it is not applicable in this case. Pennsylvania substantive law governs, not Virginia law. The discussion in Hiss reveals that the award of attorney's fees...