525 B.R. 325
Bankr. W.D. Tex.2015Background
- Subcontractor Schwertner Backhoe completed work on the Escalera Project and invoiced Dimension Builders $10,200; Dimension (owned by Howard Kirk) received payment from the homeowners but did not pay the subcontractor.
- Schwertner sued in state court asserting recovery under the Texas Construction Trust Fund Act and sought attorney’s fees under Tex. Civ. Prac. & Rem. Code § 38.001; a default-judgment motion was pending when Kirk filed Chapter 7.
- Schwertner filed an adversary in bankruptcy seeking a § 523(a)(4) nondischargeability ruling for defalcation while acting as a fiduciary and seeking attorney’s fees under Tex. Civ. Prac. & Rem. Code § 38.001 and other Texas statutes.
- Extensive agreed continuances and discovery disputes delayed the case; Kirk finally admitted the underlying debt in a November 2013 deposition and later conceded nondischargeability before the July 2014 trial.
- The sole issue at trial was the amount and dischargeability of attorney’s fees Schwertner sought; the court evaluated whether Texas statute-authorized fees could be awarded and declared nondischargeable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether attorney’s fees are recoverable for prosecuting the § 523 action | Fees are recoverable under Tex. Civ. Prac. & Rem. Code § 38.001(2) for labor performed and under other Texas statutes | No contractual fee-shifting exists; § 38.001 does not cover fees for trust-fund or defalcation claims | Fees recoverable only if authorized by statute/contract; here only § 38.001(2) may cover fees for establishing labor-performed claim |
| Whether § 38.001(2) authorizes fees for litigating misapplication of construction trust funds | § 38.001(2) covers quantum meruit/labor performed claims arising from misapplied trust funds, so fees available | § 38.001(2) does not apply to tort-like trust-fund claims; Larrison and the statute’s text exclude such awards | Court rejects broader view; § 38.001(2) limited to fees for establishing labor performed, not for trust-fund or defalcation theories |
| Whether fees incurred pre- and post-deposition are attributable to recoverable work | Fees spent to compel/depose and establish the labor claim are recoverable as they produced the admission of debt | Fees after deposition largely relate to trust-fund/defalcation and are not recoverable under § 38.001(2) | Court allows fees up to the point the labor claim was established (including costs to obtain deposition); disallows fees solely for prosecuting trust-fund/defalcation theories |
| Whether awarded fees can be declared nondischargeable | Cohen and Fifth Circuit precedent make properly awarded fees part of the nondischargeable debt | If fees are not authorized they cannot be nondischargeable; only allowed fees become part of nondischargeable debt | Court holds allowed fees ($12,420) are nondischargeable and adds them to the $10,200 judgment for a $22,620 nondischargeable judgment |
Key Cases Cited
- Jordan v. Southeast Nat’l Bank, 927 F.2d 221 (5th Cir. 1991) (state-law contractual or statutory right to fees can be awarded and treated as nondischargeable)
- Luce v. First Equip. Leasing Corp., 960 F.2d 1277 (5th Cir. 1992) (pre-petition contractual fee provisions can support fee recovery in nondischargeability context)
- Cohen v. de la Cruz, 523 U.S. 213 (1998) (Supreme Court: “debt” excepted from discharge includes attorney’s fees causally linked to the nondischargeable misconduct)
- Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195 (5th Cir. 1996) (ancillary obligations like attorney’s fees follow the status of the primary nondischargeable debt)
- Key Tronic Corp. v. United States, 511 U.S. 809 (1994) (governing choice-of-law/fee-reasonableness principles cited for application of state law)
- Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006) (Texas factors for reasonableness of attorney’s fees)