Matter of Comstock

• Citation: 16 BR 206
• Decision Date: 25 November 1981
• Docket Number: Bankruptcy No. 80-0432.
• Parties: In the Matter of Todd M. COMSTOCK, Jean M. Comstock, Debtors. Loren WETZEL, Trustee of the estate of Todd M. Comstock and Jean M. Comstock, Plaintiff, v. Vernon GOLDSMITH, Defendant, and Lee Heward, dba Lee's Custom Concrete, Additional Defendant on Counterclaim. Lee HEWARD, dba Lee's Custom Concrete, Additional Defendant on Counterclaim. and Counterclaimant, v. Vernon GOLDSMITH, Defendant, and Todd M. Comstock and Jean M. Comstock, Debtors.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho

16 B.R. 206 (1981)

In the Matter of Todd M. COMSTOCK, Jean M. Comstock, Debtors.

Loren WETZEL, Trustee of the estate of Todd M. Comstock and Jean M. Comstock, Plaintiff, v. Vernon GOLDSMITH, Defendant, and Lee Heward, dba Lee's Custom Concrete, Additional Defendant on Counterclaim.

Lee HEWARD, dba Lee's Custom Concrete, Additional Defendant on Counterclaim. and Counterclaimant, v. Vernon GOLDSMITH, Defendant, and Todd M. Comstock and Jean M. Comstock, Debtors.

Bankruptcy No. 80-0432.

United States Bankruptcy Court, D. Idaho.

November 25, 1981.

Larry E. Prince, Boise, Idaho, for plaintiff Loren Wetzel.

William F. Lee, Boise, Idaho, for defendant Goldsmith.

Steven K. Ricks, Boise, Idaho, for defendant Heward.

MERLIN S. YOUNG, Bankruptcy Judge.

On August 14, 1981, defendant Goldsmith was awarded a judgment dismissing an action brought against him by one Lee Heward for recovery of sums allegedly due under a contract for construction of retaining walls and other concrete work originally contracted for by one Comstock, a debtor seeking relief under Title 11, U.S.C. The work was done upon property then owned by Comstock but sold to Goldsmith before the work was completed. The action was removed to Bankruptcy Court from the Idaho State District Court. The sole issue now remaining is whether the defendant Goldsmith is entitled, in U.S. Bankruptcy Court, as the prevailing party, to attorney's fees incurred in the defense of the removed action pursuant to Idaho Code 12-120(2), which provides:

"In any civil action to recover on an open account, account stated, note, bill, negotiable instrument, or contract relating to the purchase or sale of goods, wares, or merchandise, unless otherwise provided by law, the prevailing party shall be allowed a reasonable attorney fee to be set by the court, to be taxed and collected as costs."

To decide this issue the applicability of Idaho Code 12-120 in United States Courts must be determined. (1) Are U.S. Courts required to give effect to such provisions in removed cases and (2) if so, does it apply to this case? I conclude that the answer to the first question is yes, and to the second, the answer is no.

The determination of the first question necessarily entails an analysis of the jurisdiction of the bankruptcy court and the relationship between state and federal law in federal courts. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), established the doctrine that federal courts sitting as an alternative forum to state courts in diversity of citizenship cases must follow the state's substantive law.

Bankruptcy courts now sit as an alternative forum to state courts in civil cases "arising in or related to cases under title 11." 28 U.S.C. § 1471. Erie settled the issue in diversity cases but in cases where the federal court's jurisdiction is based upon a "federal question" rather than diversity, there is a difference of opinion. See Weston and Lehman, "Is There Life For Erie After The Death of Diversity?" 78 Mich. L.R. 311 (1980). See also Hill, "The Erie Doctrine in Bankruptcy" 66 Harvard Law Review 1013 (1953).

It is arguable that due to the broad scope of 28 U.S.C. 1471, all law in bankruptcy matters is federal. Historically, federal courts follow the "American Rule" which denies attorney's fees to a litigant in the absence of a contract, applicable statute, or certain exceptions known as the "common fund", "private attorney general", or "vexatious litigation" exceptions. Alyeska Pipeline Service Co. v. Wilderness Society et al., 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975); Annot., 8 L.Ed.2d 894, "Prevailing Party's Right To Recover Counsel Fees in Federal Court"; 20 Am.Jur.2d Costs §§ 74, 75. However, the "American Rule" is not determinative when the federal court sits in a diversity situation. The bankruptcy court in the consideration of removed actions is in a position directly analogous to the U.S. District Court in diversity cases. I therefore conclude that the Erie rules applicable in diversity situations govern this court in removed state court actions.

The basic rule was stated in Alyeska, supra, 421 U.S. at 259, n. 31, 95 S.Ct. at 1622, n. 31:

"A very different situation is presented when a federal court sits in a diversity case. `In an ordinary diversity case where the state law does not run counter to a valid federal statute or rule of court, and usually it will not, state law denying the right to attorney\'s fees or giving a right thereto, which reflects a substantial policy of the state, should be followed.\' 6 J. Moore, Federal Practice ¶ 54.772, pp. 1712-1713 (2d ed. 1974) (footnotes omitted). See also 2 S. Speiser, Attorneys\' Fees §§ 14:3, 14:4 (1973) (hereinafter Speiser); Annotation, Prevailing Party\'s Right to Recover Counsel Fees in Federal Courts, 8 L.Ed.2d 894, 900-901. Prior to the decision in Erie R. Co. v. Tompkins, 304 U.S. 64 58 S.Ct. 817, 82 L.Ed. 1188 (1938), this Court held that a state statute requiring an award of attorneys\' fees should be applied in a case removed from the state courts to the federal courts: `It is clear that it is the policy of the state to allow plaintiffs to recover an attorney\'s fee in certain cases, and it has made that policy effective by making the allowance of the fee mandatory on its courts in those cases. It would be at least anomalous if this policy could be thwarted and the right so plainly given destroyed by removal of the cause to the federal courts.\' People of Sioux County v. National Surety Co., 276 U.S. 238, 243 48 S.Ct. 239, 240, 72 L.Ed. 547 (1928). The limitations on the awards of attorneys\' fees by federal courts deriving from the 1853 Act were found not to bar the award. Id., at 243-244 48 S.Ct. at 240. We see nothing after Erie requiring a departure from this result. See Hanna v. Plumer, 380 U.S. 460, 467-468 85 S.Ct. 1136, 1141, 14 L.Ed.2d 8 (1965). The same would clearly hold for a judicially created rule, although the question of the proper rule to govern in awarding attorneys\' fees in federal diversity cases in the absence of state statutory authorization loses much of its practical significance in light of the fact that most States follow the restrictive American rule. See 1 Speiser §§ 12:3, 12:4."

This rule has been followed by the Court of Appeals for the 9th Circuit. See e.g. Klopfenstein v. Pargeter, 597 F.2d 150 (9th Cir. 1978), Schultz v. Lamb, 591 F.2d 1268 (9th Cir. 1978); Interform Company v. Mitchell, 575 F.2d 1270 (9th Cir. 1978). In Interform, supra, the U.S. District Court for the State of Idaho had denied the prevailing party attorney's fees in an action on a public works surety bond. The Court of Appeals found that, while the District Court was correct in looking to Idaho law to determine the contractual issue involved in the case, it erred with regard to the attorney's fees question since the Idaho Code provided that, in actions brought upon public contractor's bonds, the prevailing party shall recover a reasonable attorney's fee to be taxed as costs. The court stated:

"We must, of course, follow Idaho law as to attorney\'s fees in this diversity action; see People of Sioux County v. National Surety Co., 276 U.S. 238, 48 S.Ct. 239, 72 L.Ed. 547 (1928); 6 Moore\'s Federal Practice ¶ 54.77(a) at 1712-13 (1976)."

In the case of Sioux County, referred to by both the Court of Appeals for the 9th Circuit and the U.S. Supreme Court, in Alyeska, an action was brought by the county against a surety on its bond guaranteeing public funds on deposit in a defunct bank. An attorney's fee was provided for by statute. The case was removed to federal district court as a diversity case where plaintiff was awarded a judgment on the bond and an attorney's fee. The Court of Appeals reversed, disallowing recovery on the bond as well as the attorney's fee. It struck down the fee award on the ground that the state statute classified such an award as costs, and that costs in the federal courts were regulated exclusively by federal statute. The U.S. Supreme Court reversed and held that the state provision established a right to recover sums expended for legal services even though they were characterized as costs by the state law. The U.S. Supreme Court stated:

"Whether this liability for an attorney\'s fee, assumed by entering into an insurance contract after the enactment of the statute providing for the liability, may be enforced in the federal courts does not depend

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