NF Clean v. Kakal (In re Kakal)

• Citation: 596 B.R. 335
• Decision Date: 24 January 2019
• Docket Number: ADVERSARY NO. 18-3010,CASE NO: 17-35014
• Parties: IN RE: Salim KAKAL, Debtor(s) NF Clean, Prestacao De Servicos, Plaintiff(s) v. Salim Kakal, Defendant(s)
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas

596 B.R. 335

IN RE: Salim KAKAL, Debtor(s)NF Clean, Prestacao De Servicos, Plaintiff(s)

v.Salim Kakal, Defendant(s)

CASE NO: 17-35014

ADVERSARY NO. 18-3010

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed January 24, 2019

John Seth Bullard, Warren Browning Wise, Orgain Bell & Tucker LLP, Beaumont, TX, for Plaintiff.

Thomas Edward Ross, Attorney at Law, Houston, TX, for Defendant.

MEMORANDUM OPINION

Marvin Isgur, UNITED STATES BANKRUPTCY JUDGEOn September 25, 2018, the Court found Salim Kakal's debt to NF Clean nondischargeable pursuant to 11 U.S.C. § 523(a)(4), and (6). The remaining issues before the Court are (i) whether NF Clean is entitled to attorney's fees and if so, (ii) whether those fees are also non-dischargeable pursuant to § 523. Kakal argues that NF Clean has no basis to support an award of attorney's fees. NF Clean counters that its attorney's fees are non-dischargeable pursuant to (i) Texas Civil Practice and Remedies Code § 38.001, and (ii) the Texas Theft Liability Act.

For the reasons set forth below, NF Clean is entitled to attorney's fees under the Texas Theft Liability Act, and the fees are excepted from discharge under § 523(a)(4).

Background

Sometime in 2013, NF Clean Prestacao de Servicos and Salim Kakal entered into an oral agreement for the purchase of a 2013 Ford F150 Raptor Crew Cab (the "Truck"). (ECF No. 14 at 3). Under the agreement, Salim Kakal or his company, Mondex International, Inc., would purchase the Truck from Ray Skillman Ford, Inc. in Indiana on NF Clean's behalf. (ECF No. 14 at 3). After purchasing the Truck, Kakal would then ship the Truck from Indiana to Houston, and thereafter to Angola where it would reach NF Clean. (ECF No. 14 at 3).

Pursuant to the agreement, Kakal purchased the Truck from Ray Skillman Ford on September 13, 2013 for $68,9292.75. (ECF No. 14 at 4). For the purchase of the Truck plus shipping charges, NF Clean paid Kakal a total of $84,851.87. While in transit to Houston, however, the Truck was stolen. (ECF No. 14 at 4). Sometime in September 2014, Salim Kakal recovered the stolen Truck. (July 9, 2018 Hearing at 10:29 a.m.). Although Kakal acknowledged that the stolen Truck was NF Clean's property when he regained possession, Kakal admitted to selling the Truck to a third party, and failed to remit any of the sale proceeds to NF Clean. (July 9, 2018 Hearing at 10:23 a.m.). NF Clean never received the Truck or its proceeds.

On March 30, 2016, NF Clean filed a lawsuit in the 61st Judicial District of Harris County against both Kakal, individually, and Mondex, asserting claims for breach of contract, fraud, breach of fiduciary duty, conversion, alter ego, and sham to perpetrate a fraud. (ECF No 1 at 3; ECF No. 14–1 at 4). On August 18, 2017, Kakal filed for chapter 7 bankruptcy, staying the state court lawsuit. (Case No. 17-35014, ECF No. 1). Kakal's chapter 7 case was subsequently converted to a chapter 13 bankruptcy on October 26, 2017. (Case 17-35014, ECF No. 27). On January 1, 2018, NF Clean initiated this adversary proceeding against Kakal, alleging that Kakal's debt to NF Clean was nondischargeable under 11 U.S.C. § 523(a)(2), (4), and (6). (ECF No. 1 at 3).

The court held an evidentiary hearing on July 9, 2018, during which Kakal provided testimony. (July 9, 2018 Hearing at 10:20 a.m.). At the conclusion of the hearing, the Court held that Kakal's debt to NF Clean was nondischargeable under § 523(a)(4) and (6), and that Kakal was liable for damages in the amount of $54,255.73. (July 9, 2018 Hearing at 11:31 a.m.). Specifically, the Court found that:

(i) None of the elements of § 523(a)(2) were proven;

(ii) No fiduciary relationship existed between NF Clean and Salim Kakal sufficient to find fraud or defalcation under § 523(a)(4) ;

(iii) Salim Kakal committed larceny and embezzlement under § 523(a)(4) when he received the stolen Truck, subsequently sold it to a third-party, and failed to remit any of the proceeds of sale to NF Clean;

(iv) The act of selling the recovered Truck, which belonged to NF Clean at the time, was willful and malicious under § 523(a)(6).

(July 9, 2018 Hearing at 11:31 a.m.).

The parties were unable to reach an agreement regarding appropriate attorney's fees. On September 24, 2018, Kakal filed a brief opposing an award of attorney's fees. (See ECF No. 17). Kakal argued that NF Clean was not entitled to recover attorney's fees, because (i) prepetition fees cannot be awarded without a state court judgment, and (ii) post-petition fees "can only be awarded where there is a contract between the parties that entitles the creditor to legal fees." (ECF No. 17 at 1).

On September 25, 2018, NF Clean filed its response, arguing that it is entitled to reasonable and necessary attorney's fees and that such fees are nondischargeable. (ECF No. 19 at 2). NF Clean conceded that there was no state court judgment in this case, but argued that under Texas law, "creditors ... can recover attorney's fees if there is a contractual or statutory right to fees under state law." (ECF No. 19 at 4). Specifically, NF Clean argues that it is entitled to attorney's fees on the basis of (i) Texas Civil Practice and Remedies Code § 38.001 for breach of contract, and (ii) the Texas Theft Liability Act ("TTLA") for theft. (See ECF No. 20).

On September 25, 2018, the Court held a hearing on NF Clean's entitlement to attorney's fees. The Court agreed that a state court judgment was not a prerequisite for an award of attorney's fees. However, the Court pointed out that Kakal's debt to NF Clean is a mixed claim in that it consists of both dischargeable and non-dischargeable debt. The Court noted that under Texas law, parties are entitled to attorney's fees if the claim is based on a breach of contract but are not when the claim is for willful and malicious conduct. (September 25, 2018 Hearing at 1:38 p.m.). The Court requested further briefing on the effect of a mixed claim on the dischargeability of attorney's fees.

NF Clean submitted further briefing on October 8, 2018. The Court took this matter under advisement on October 10, 2018.

Jurisdiction

The District Court has jurisdiction over this proceeding under 28 U.S.C. § 1334(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O). Pursuant to 28 U.S.C. § 157(a), this proceeding has been referred to the Bankruptcy Court by General Order 2012-6.

Analysis

Under the "American Rule" each party pays its own attorney's fees arising out of litigation. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975). An exception exists, however, when a specific authority granted by statute or contract—a "fee shifting" provision—states otherwise. Id. at 263, 95 S.Ct. 1612. Thus, under Texas law, a party is entitled to attorney's fees when either a contract provides for such fees, or when a statute indicates it may recover such fees.

Bankruptcy courts analyzing the dischargeability of attorney's fees under § 523, have ordinarily viewed and analyzed those fees in two separate categories—those awarded as part of a judgment and those incurred in the prosecution of the dischargeability action. When a bankruptcy court concludes that a particular judgment debt is non-dischargeable, attorney's fees awarded by the state court under an enforceable contract or state statute in connection with that non-dischargeable debt will also be deemed non-dischargeable. In re Gober , 100 F.3d 1195, 1208 (5th Cir. Tex. 1996) ("When the primary debt is nondischargeable due to willful and malicious conduct, the attorney's fees and interest accompanying compensatory damages, including post-judgment interest, are likewise nondischargeable.") (citations omitted); In re Luce , 960 F.2d 1277, 1285 (5th Cir. Tex. 1992) ("When a bankruptcy court determines that the underlying debt is nondischargeable, then ‘attorney's fees awarded by a state court based on state statutory or contractual grounds are [also] nondischargeable.’ "). Here, there is no state court judgment on which NF Clean may rely for the recovery of attorney's fees; therefore, the remaining issues are: (i) whether there is a basis for an award of attorney's fees incurred in connection with the prosecution of the dischargeability of Kakal's debt to NF Clean, and, if there is a basis for those fees, (ii) whether such are excepted from discharge under § 523.

The Bankruptcy Code does not independently provide attorney's fees to a party seeking an exception to discharge. See In re Koukhtiev , 576 B.R. 107, 135 (Bankr. S.D. Tex. 2017) (indicating that 11 U.S.C. § 523 does not independently provide for attorney's fees as a relief to the prevailing party). Under certain circumstances, however, attorney's fees are allowed in nondischargeability actions in bankruptcy court. In re Willliams , 337 F.3d 504, 512 (5th Cir. 2003) (holding non-dischargeable under § 523(a)(6) sanctions awarded for violation of a court order). There must, however, exist a basis for an award of attorney's fees.

To be declared nondischargeable under § 523, attorney's fees must be (i) allowed by statute or contract, and (ii) arise from or on account of the conduct that resulted in a nondischargeable debt. Schwertner Backhoe Services, Inc. v. Kirk (In re Kirk) , 525 B.R. 325, 330 (Bankr. W.D. Tex. 2015) ("Since the Bankruptcy Code does not address whether creditors can recover attorney's fees in nondischargeability cases, they can only do so if allowed by another statute or contract."). Thus, although attorney's fees are allowed in nondischargeability actions in bankruptcy court, there must still be a contractual or statutory basis for providing those fees.

The Court did not find non-dischargeable damages from Kakal's breach of the contract. The non-dischargeable damages were awarded due to his subsequent theft of the proceeds of the sale of the truck. Accordingly, there are no non-dischargeable fees awardable under the contract. NF Clean nonetheless argues that it...