536 B.R. 254
Bankr. E.D. Ark.2015Background
- Clear Sky Properties, LLC (Clear Sky) was a 50/50 member LLC formed by Deere and Roussel; Deere later became majority owner after exercising a right of first refusal.
- Roussel secretly planned and opened a competing Exit Realty franchise with others; Clear Sky and Deere sued in state court for breach of fiduciary duty (both) and breach of contract (Deere).
- Jury awarded Clear Sky $300,000 (compensatory and punitive) for breach of fiduciary duty; Deere received $58,800 for breach of fiduciary duty and $40,000 for breach of contract. State court later awarded $82,611.25 in attorneys’ fees and $4,912 in costs to Plaintiffs.
- Roussel filed Chapter 7 bankruptcy; district court held (on appeal) that Clear Sky’s $300,000 award was nondischargeable under 11 U.S.C. § 523(a)(4) and (a)(6), and Deere’s $58,800 fiduciary award was nondischargeable under § 523(a)(4); Deere’s $40,000 contract award is dischargeable.
- This remand required the bankruptcy court to decide whether the state-court fee award (grounded in Clear Sky’s operating agreement and Arkansas statute) is part of the nondischargeable debt.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether fees awarded under Clear Sky Operating Agreement are part of nondischargeable debt | Operating Agreement makes prevailing member whole; fees awarded under that contract are part of prepetition debt and thus nondischargeable | Bankruptcy court may exercise discretion; fee award should be revisited; fees tied to contract claim (dischargeable portion) so should be discharged | Fees awarded to Clear Sky under the operating agreement are part of the nondischargeable debt (entire fee award to Clear Sky nondischargeable) |
| Whether fees attributable to Deere must be apportioned between dischargeable and nondischargeable claims | All fees were awarded jointly to Plaintiffs and tied to fiduciary breach (nondischargeable) | Fees relate partly to Deere’s contract claim (dischargeable), so apportionment is required | Deere’s fee/cost award apportioned: 59.51417% nondischargeable; remaining percentage dischargeable |
| Whether bankruptcy court may re-litigate state court’s reasonableness or amount of fee award | Plaintiffs: state court already determined amount/reasonableness; award is prepetition claim | Roussel: asks bankruptcy court to revisit award and discharge it | Bankruptcy court will not reexamine state-court reasonableness under Rooker–Feldman; it treats the award as a prepetition claim and only decides dischargeability/apportionment |
| Proper method for apportioning fees when award was joint to multiple plaintiffs with mixed dischargeability | Plaintiffs: because Clear Sky had no contract claim, the fee award must be attributable to fiduciary (nondischargeable) claims | Roussel: joint award should be apportioned to reflect Deere’s dischargeable contract damages | Court: must honor state-court joint award; gives entire award to Clear Sky as nondischargeable and apportions Deere’s share by percentage of her nondischargeable damages |
Key Cases Cited
- Cohen v. de la Cruz, 523 U.S. 213 (1998) (statutory phrase “debt for” covers debts arising from underlying wrongful conduct, permitting ancillary recovery to be nondischargeable)
- Alport v. Ritter (In re Alport), 144 F.3d 1163 (8th Cir. 1998) (contractual attorney-fee provisions can be part of nondischargeable debt)
- Jennen v. Hunter (In re Hunter), 771 F.2d 1126 (8th Cir. 1985) (ancillary obligations like attorneys’ fees may be apportioned to nondischargeable debt and remand for allocation appropriate)
- In re Fobian, 951 F.2d 1149 (9th Cir. 1991) (attorneys’ fees under contract may attach to primary debt and be nondischargeable)
- Dodson v. Univ. of Ark. for Med. Sciences, 601 F.3d 750 (8th Cir. 2010) (Rooker–Feldman limits federal review of state-court judgments)