Cadle Co. v. Carlos Julio Martinez

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
JULY 13, 2005
No. 04-11760
THOMAS K. KAHN
________________________
CLERK

D. C. Docket Nos. 03-21963-CV-JEM & 02-10858-BKC-RA

In Re: CARLOS JULIO MARTINEZ,

Debtor.
____________________________________________________

CADLE COMPANY,

Plaintiff-Appellee,

versus

CARLOS JULIO MARTINEZ,

Defendant-Appellant.
________________________

Appeal from the United States District Court
for the Southern District of Florida
_________________________

(July 13, 2005)

Before DUBINA, PRYOR and RONEY, Circuit Judges.

RONEY, Circuit Judge:

Carlos Martinez filed a Chapter 7 bankruptcy petition listing the Cadle

Company as a creditor on a $50,000 commercial loan originally made by Barnett
Bank to Martinez and assigned to Cadle. Cadle had filed suit against Martinez in

state court, but the bankruptcy petition preceded the resolution of that case. Cadle

opposed the discharge of the debt in bankruptcy by filing an Adversary Complaint

in the bankruptcy court arguing that the debt should not be dischargeable under 11

U.S.C. § 523(a)(2) and (6), because Martinez had made oral and written

misrepresentations in obtaining the loan by representing that the purpose of the

loan was to help his own business, when in fact the proceeds went to assist his

brother.

After a full trial, the bankruptcy court held that Cadle failed to prove that

Martinez had made any false representations that were relied upon in approving

the loan and that the loan was indeed dischargeable. Martinez then moved for

attorney’s fees against Cadle. Fees were granted by the bankruptcy court. The

district court reversed. We reverse and hold that, under the facts and the law in

this case, the judgment of the bankruptcy court relating to attorney’s fees and costs

should have been affirmed by the district court.

The district court adopted the holding of In re Sheridan, 105 F.3d 1164 (7th

Cir. 1997), and held that Florida’s reciprocal attorney’s fee statute, Florida Statute

§ 57.105(6) did not apply, and that there was no precedential support for an award

of fees to a prevailing debtor, such as Martinez, in non-consumer debt cases under

federal law. In a case of first impression in this Circuit, we hold that a prevailing

2
debtor in a dischargeability action brought by his creditor can recover his

attorney’s fees and costs incurred in those dischargeability proceedings if recovery

of such are due under an enforceable contractual right, such as a statutory

reciprocal attorney’s fee provision, provided for by state law.

Generally, in federal litigation, including bankruptcy litigation, a prevailing

litigant may not collect an attorney’s fee from his opponent unless authorized by

either a federal statute or an enforceable contract between the parties. See Alyseka

Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247 (1975); In re Fox, 725

F.2d 661, 662 (11th Cir. 1984). The sole federal statutory authority for an award

of attorney’s fees and costs in a dischargeability proceeding under section

523(a)(2) appears at section 523(d), which provides attorney’s fees and costs for a

prevailing debtor if a creditor “requests a determination of dischargeability of

consumer debtor under subsection (a)(2) of this section, and such debt is

discharged . . ..” 11 U.S.C. § 523(d). Here, it is undisputed that Martinez’s debt

involved commercial rather than consumer debt so that federal statutory provision

thus does not apply.

As to the contract between the parties, the “Business Note and Security

Agreement” between Martinez and Barnett Bank, which was executed in Florida,

expressly stated that it was to be “governed by and construed in accordance with”

3
Florida law. The contract contained an “Attorneys’ Fees” and “Expenses”

provision that stated the following in relevant part:

Borrower agrees to pay upon demand all of Lender’s
costs and expenses, including reasonable attorney’s fees
and Lender’s legal expenses, incurred in connection with
the enforcement of this Agreement. . . . Costs and
expenses include Lender’s reasonable attorney’s fees and
legal expenses whether or not there is a lawsuit,
including reasonable attorney’s fees and legal expenses
for bankruptcy proceedings (and including efforts to
modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection
services.

In sum, the contract provided that Barnett, the creditor, would be entitled to

attorney’s fees in enforcing the contract against Martinez if it had won. Florida

law, however, guarantees that contractual provisions for attorney’s fees cannot be

one-sided. Florida Statute § 57.105(6), which has been recodified into several

varying subsections of the Florida Statutes but is identical to the subsection

analyzed by the district and bankruptcy courts here, contains the following

reciprocal attorney’s fees provision:

If a contract contains a provision allowing attorney’s
fees to a party when he or she is required to take any
action to enforce the contract, the court may also allow
reasonable attorney’s fees to the other party when that
party prevails in any action, whether as plaintiff or
defendant, with respect to the contract. This subsection
applies to any contract entered into on or after October 1,
1988.

4
Fla. Stat. § 57.105(6).

TranSouth Fin. Corp. v. Johnson, 931 F.2d 1505 (11th Cir. 1991), involved a

claim for attorney’s fees by a creditor who had successfully opposed the

dischargeability of the debt in bankruptcy. This Court held that, although § 523 of

the Bankruptcy Code did not expressly provide for attorney’s fees, “a creditor

successful in a dischargeability proceeding may recover attorney’s fees when such

fees are provided for by an enforceable contract between the creditor and debtor.”

931 F.2d at 1509. This Court reasoned that the “debt” excused from discharge in a

successful bankruptcy action included a debtor’s contractual obligation to pay a

creditor’s attorney’s fees if the agreement to pay those fees was indeed enforceable,

which was governed by local law. 931 F.2d at 1507. We then looked to Florida

law and reasoned as follows:

The Note clearly and unambiguously provides that the
[debtors] would be liable for [the creditor’s] attorney’s
fees in the event [they] defaulted and [the creditor] had to
hire an attorney to collect the balance due on the Note.
Florida law validates and enforces such contractual
provisions for reasonable attorney’s fees. See, e.g., Cheek
v. McGowan Elec. Supply Co., 511 So. 2d 977 (Fla.
1987); Sybert v. Combs, 555 So. 2d 1313, 1313-14 (Fla.
Dist. Ct. App. 1990).

931 F.2d at 1508.

After determining that the contract for attorney’s fees between the debtor and

creditor was enforceable under Florida law, we noted, “One of the primary

5
purposes of the bankruptcy act is to relieve the honest debtor from the weight of

oppressive indebtedness and permit him to start afresh.” 931 F.2d at 1508

(citations and quotations omitted). We determined, however, that because the

debtor in TranSouth had attempted to defraud the creditor, “allowing [the creditor]

to recover attorney’s fees under circumstances of this case will not contravene the

‘fresh start’ policy of the Bankruptcy Code, which was designed to protect the

honest debtor.” 931 F.2d at 1508.

The facts of the TranSouth case did not address the converse situation, as we

have here, where a prevailing debtor in a dischargeability proceeding seeks

attorney’s fees.

Most of the bankruptcy courts interpreting our TranSouth decision have

extended its reasoning to include debtors who have prevailed in dischargeability

proceedings. See In re Hunter, 243 B.R. 824, 826 (Bankr. M.D. Fla. 1999)

(awarding fees to prevailing debtor in dischargeability proceeding brought by

creditor); In re Mowji, 228 B.R. 321, 323-24 (Bankr. M.D. Fla. 1999); In re Eckert,

221 B.R. 40, 45-46 (Bankr. S.D. Fla. 1998); In re Woollacott, 211 B.R. 83, 87

(Bankr. M.D. Fla. 1997); Pichardo v. United Student Aid Funds, Inc., 186 B.R.

279, 283 (Bankr. M.D. Fla. 1995); but see In re Maestrelli, 172 B.R. 368, 371

(Bankr. M.D. Fla. 1994) (holding that “it would be stretching the holding of

TranSouth to conclude that it equally applies to debtors in litigation which is not a

6
civil suit in the orthodox sense but merely a determination of dischargeability, vel

non, of a debt pursuant to § 523(c) of the Bankruptcy Code in which the only

provision which permits the award of attorney’s fees to a debtor is pursuant to §

523(d), a Section not applicable . . .. Thus, the mutuality of remedy provisions of

Fla. Stat. § 57.105(2) does not apply in the present instance notwithstanding

TranSouth.”).

In a 2-1 decision, the Seventh Circuit, which the district court here adopted,

held to the contrary. See In re Sheridan, 105 F.3d 1164 (7th Cir. 1997). There, the

court held that a prevailing debtor in a dischargeability proceeding could not

receive attorney’s fees under federal bankruptcy law absent an expressed

contractual provision stating that the debtor was entitled to those fees. 105 F.3d at

1167. The Sheridan court refused to look to Florida law and declined to

incorporate its reciprocal attorney’s fees statute, reasoning, “Although the validity

of a creditor’s claim in bankruptcy is assessed by looking to relevant state law rules

. . ., the alleged non-dischargeability of that debt presents an issue of federal law

independent of the issue of the validity of the underlying claim.” 105 F.3d at 1167

(internal quotation and citation omitted). The “basis under federal law” for

recognizing the creditor’s contractual right to recover claim was, the Sheridan

court opined, under Seventh Circuit precedent and to decisions similar to our

TranSouth decision, that the attorneys’ fee contract between the debtor and creditor

7
became part of the “debt” deemed non-dischargeable under section 523(a)(2). 105

F.3d at 1167. The court then reasoned that there “is no similar basis under the

Bankruptcy Code for incorporating the Florida reciprocity statute on which [the

debtor] relies.” 105 F.3d at 1167.

Judge Cudahy’s dissent in Sheridan, however, recognized that Florida law,

which applies to Florida contracts, does not permit one-sided attorney’s fees

provisions in enforcing a contract. Here, Cadle, in an attempt to increase its

likelihood of getting paid on Martinez’s note – i.e., in an attempt to enforce that

contract, which would have been substantially diminished had the bankruptcy court

discharged that debt – , filed an adversary complaint questioning the usage of those

loaned funds. Had Cadle prevailed at the adversary proceedings, then TranSouth

would dictate that Cadle get its attorney’s fees under the contract provision, so long

as it was valid under Florida law. Florida law says that you cannot have one-sided

attorney’s fee contract provision. It is as if the contract between Barnett Bank and

Martinez “contained a clause reciting the language of Florida Statutes §57.105(2).”

In re Sheridan, 105 F.3d at 1168 (Cudahy, J., dissenting); see also City of

Homestead v. Beard, 600 So. 2d 450, 454-55 (Fla. 1992) (noting that “the laws

existing at the time and place of the making of the contract where it is to be

performed which may affect its validity, construction, discharge, and enforcement,

8
enter into and become part of the contract as if they were expressly referred to or

actually copied or incorporated therein”) (quotation and citation omitted).

Here, the debtor prevailed, and there was a contractual right to attorney’s

fees under the “Business Note and Security Agreement” contract between the

debtor and creditor when it was read in light of the Florida’s attorney’s fee

reciprocity statute, which was incorporated into the contract by operation of law.

This award of attorney’s fees is without regard to whether “state law issues” were

“actually litigated” in the bankruptcy dischargeability proceedings because the

recoverability of attorney’s fees and costs under the facts and circumstances of this

case is afforded by a matter of contract. But see, Renfrow v. Draper, 232 F.3d 688,

694 (9th Cir. 2000) (reversing award of attorney’s fees to creditor in

dischargeability proceedings because “attorney’s fees should be awarded solely to

the extent that they were incurred in litigating state law issues”). To deny a debtor

attorney’s fees and costs for prevailing in a dischargeability proceeding brought by

a creditor, where those same fees would have been available under state contract

law for the creditor had it prevailed, would contravene the primary purpose of the

bankruptcy statute, which is “to relieve the honest debtor from the weight of

oppressive indebtedness and permit him to start afresh.” TranSouth Fin. Corp.,

931 F.2d at 1508 (quotation and citation omitted).

9
 The district court’s order reversing judgment of the bankruptcy court is

reversed, and the judgment of the bankruptcy court relating to attorney’s fees and

costs is reinstated.

REVERSED AND REMANDED.

10