Davis v. Melcher (In Re Melcher)Davis v. Melcher (In Re Melcher)
DECISION REGARDING DEFENDANTS’ REQUEST FOR ENTRY OF ORDER FIXING COSTS
Before the court is the Defendants’ Request for Entry of Order Fixing Costs (Docket Entry (“D.E.”) No. 30, filed December 10, 2004). As noted in the Plaintiffs Opposition to Defendants’ Request for Entry of Order Fixing Costs (D.E. No. 35, filed December 11, 2004), the defendants included a bill of costs as part of the motion and incorporated attorney’s fees into the request for costs. Taxable costs do not include attorney’s fees. However, § 523(d) of the Bankruptcy Code (11 U.S.C.) does authorize the recovery of attorney’s fees in certain circumstances.
However, the court sees no reason to put the parties through those potential procedural hoops. Even if the court were to allow the request to be amended, an award of attorney’s fees under § 523(d) would be inappropriate. The court will accordingly limit the defendants to taxable costs.
I
This case involved an allegation that the defendants, who were building a house adjacent to the plaintiffs, employed a contractor who obtained building permits through fraud (as he was unlicensed), and because of that fraud, engaged in construction activities that damaged the structural integrity of the plaintiffs home. The principal claim was of injury to the plaintiffs property, a claim that sounds more like a tort claim for which nondischargeability is usually pursued under § 523(a)(6) (a claim whose dismissal does not give rise to a right to seek recovery of attorney’s fees under § 523(d)) instead of § 523(a)(2). For this and other reasons, the facts of this case are not typical of cases brought under § 523(a). The court granted summary judgment in favor of the defendants, based on the absence of a debt for property obtained, the lack of proximate causation, and the lack of justifiable rebanee.
Davis v. Melcher (In re Melcher),
II
In order for the court to even decide whether fees can be recovered under § 523(d), a threshold matter must be determined. As far as the court can ascertain, the defendants did not request attorney’s fees in the answer to the plaintiffs complaint, or in any other filings in this case. Courts are split on whether or not a debtor must specifically request attorney’s fees in the answer to a plaintiffs complaint. Courts have recognized the conflict created by § 523(d) and Rule 7008(b) of the Federal Rules of Bankruptcy Procedure. Rule 7008(b) requires that “A request for Attorney’s fees shall be pleaded as a claim in a complaint, cross-claim, third-party complaint, answer, or reply as may be appropriate.” Section 523, on the other hand, simply instructs that the “court shall grant judgment in favor of the debtor for the costs of [attorney’s fees]” and is silent on whether or not the defendants must request attorney’s fees in the initial response to the plaintiffs complaint.
The court in
Commercial Union Insurance Co. v. Sidore (In re Sidore),
Ill
A comprehensive explanation of the requirements of § 523(d) is found in
Phillips v. Napier (In re Napier),
In order to prevail on a motion for attorney’s fees, the Debtor must prove that: (1) the Creditor requested a determination of dischargeability; (2) the debt is a consumer debt; and (3) the debt was discharged. See American Savs. Bank v. Harvey (In re Harvey),172 B.R. 314 , 317 (9th Cir. BAP 1994); FCC Nat. Bank v. Dobbins,151 B.R. 509 , 511 (W.D.Mo.1992); Turning Stone Casino v. Vianese (In re Vianese),195 B.R. 572 , 576 (Bankr.N.D.N.Y.1995). Once the Debtor establishes these elements, the burden shifts to the Creditor to show that his actions were substantially justified. Dobbins,151 B.R. at 511 (citing Chrysler First Fin. Servs. Corp. v. Rhodes (In re Rhodes),93 B.R. 622 , 624 (Bankr.S.D.Ill.1988)). “Substantially justified” means more than frivolous, or undeserving of sanctions. FCC Nat. Bank/First Card v. Friend (In re Friend),156 B.R. 257 , 262 (Bankr.W.D.Mo.1993). The requirements for substantial justification are: (1) a reasonable basis in law for the theory it propounds; (2) a reasonable basis in truth for the facts alleged; and (3) a reasonable connection between the facts alleged and the legal theory advanced. America First Credit Union v. Shaw (In re Shaw),114 B.R. 291 , 295 (Bankr.D.Utah 1990); Friend,156 B.R. at 262 .... Moreover, an award of fees shall not be permitted if any special circumstances exist which would make the award unjust. Dobbins,151 B.R. at 511 n. 3.
Id.
A.
The court first addresses whether the debt the' plaintiff alleged was incurred because of the damage to the plaintiffs property can be considered a “consumer debt.” “Consumer debt” as defined in the Code “means debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C. § 101(8) (previously numbered § 101(7)). Many courts have tried to make a determination in special situations whether or not certain debts are “consumer debts.”
See In re
The quasi-tort aspect of the case suggests the alleged debt was not a consumer debt. The fraud claim the plaintiff pressed, although rejected by the court, was that the defendants tried to do a construction job “on the cheap,” through false building permit applications, and by using an unlicensed contractor (who injured their neighbor’s property), thus presenting an element of profit. If viewed that way, the debt would not ordinarily be thought of as a consumer debt. Moreover, the debt was proximately caused by the contractor’s negligence, and such a debt, involving no element of volition, has been held, as in the case of taxes, not to be a consumer debt.
In re Marshalek,
The court concludes that the alleged debt is not a consumer debt. The debt must be viewed from the perspective of the plaintiffs theory of a fraud debt which entailed a profit motive because the defendants engaged in fraud to perform construction on the cheap. That removes the debt from the category of debts incurred for household purposes. Moreover, the real cause of the plaintiffs injuries was the contractor’s negligence, and like an automobile accident or taxes, such a debt is not incurred for a purpose. It may have been incurred incident to renovating a house (a household purpose) but negligence by definition is unintended and thus cannot be a debt incurred for a household purpose. In any event, any doubt as to whether the debt was a consumer debt is arguably relevant to the court’s later consideration of the final factor of whether special circumstances make an award of fees inappropriate.
B.
The court further concludes that the plaintiff was substantially justified in bringing this case. The “substantially justified” and “special circumstances” exceptions of § 523(d) are derived from the Equal Access to Justice Act (“EAJA”), 28 U.S.C. § 2412(d)(1)(A).
See Burns,
Although the strength of the government’s position in the litigation obviously plays an important role in a substantial justification evaluation, the reasonableness inquiry “may not be collapsed into [an] antecedent evaluation of the merits, for EAJA sets out a distinct legal standard.” Cooper v. United States R.R. Ret. Bd.,24 F.3d 1414 , 1416 (D.C.Cir.1994) (internal quotation marks omitted). The statutory structure assumes that the government can lose on the merits and nevertheless be found to have taken a substantially justified position. Underwood,487 U.S. at 569 ,108 S.Ct. at 2552 . See De Allende v. Baker,891 F.2d 7 , 12 (1st Cir.1989) (“The mere fact that the government lost in the underlying litigation does not create a presumption that its position was not substantially justified.”). “To be ‘substantially justified’ means, of course, more than merely undeserving of sanctions for frivolousness,” Underwood,487 U.S. at 566 ,108 S.Ct. at 2550 , but at the same time the standard does not “require the Government to establish that its decision to litigate was based on a substantial probability of prevailing.” Spencer v. NLRB,712 F.2d 539 , 557 (D.C.Cir.1983) (quoting H.R.Rep. No. 96-1418, at 10-11 (1980)[, U.S.Code Cong. & Admin.News 1980, 4984, 4988-4990]). Here as in other areas courts need to guard against being “subtly influenced by the familiar shortcomings of hindsight judgment.” Beck v. Ohio,379 U.S. 89 , 96,85 S.Ct. 223 , 228,13 L.Ed.2d 142 (1964). Cf. Christiansburg Garment Co. v. EEOC,434 U.S. 412 , 421-22,98 S.Ct. 694 , 700,54 L.Ed.2d 648 (1978) (courts must “resist the understandable temptation to engage in post hoc reasoning by concluding that, because a plaintiff did not ultimately prevail, his action must have been unreasonable or without foundation”). Not all opinions can aspire to what was said of those of Justice Brandéis — that in them “the right doctrine emerges in heavenly glory and the wrong view is consigned to the lower circle of hell,” HENRY J. FRIENDLY, Mr. Justice Brandéis — The Quest for Reason, in BENCHMARKS 291, 294 (1967) — but there is always the hope that, after decision, the “wrong view” looks considerably less plausible than it did before. But just as discovery of contraband does not establish probable cause, nor an accident negligence, nor poor returns an imprudent trustee, so too a loss on the merits does not mean that legal arguments advanced in the context of our adversary system were unreasonable.
Our EAJA jurisprudence reflects this principle. It “requires that the district court do more than explain, repeat, characterize, and describe the merits ... decision.” [Citing Halverson v. Slater,206 F.3d 1205 , 1209 (D.C.Cir.2000).] Courts evaluating substantial justification must instead analyze why the government’s position failed in court: if, for example, the government lost because it vainly pressed a position “flatly at odds with the controlling case law,” Am. Wrecking Corp. v. Sec. of Labor,364 F.3d 321 , 326-27 (D.C.Cir.2004) (internalquotation marks omitted), that is one thing; quite another if the government lost because an unsettled question was resolved unfavorably. See United States v. Hallmark Constr. Co., 200 F.3d 1076 , 1080 (7th Cir.2000) (“the district court must reexamine the legal and factual circumstances of the case from a different perspective than that used at any other stage of the proceeding”).
Taucher v. Brown-Hruska,
This adversary proceeding did not fit within the usual type of § 523(a)(2) complaint, a loan procured by fraud. Instead, it turned on a novel theory of liability for damages inflicted by a general contractor after submitting building permit applications falsely reciting that the contractor was licensed. Although that theory was ultimately rejected, the very novelty of the facts and the plaintiffs theory, and the fact that each of its elements had some plausibility, requires a finding that the plaintiff was substantially justified in pursuing the claim.
See Desert Palace, Inc. v. Baumblit (In re Baumblit),
First, the court assumed that the contractor’s fraud (the deceitfully false statements in the building permit applications) could be imputed to the defendants as the general contractor was their agent.
Mel-cher,
Second, the court concluded that the defendants acquired no property by reason of the fraudulent statements.
Mel-cher,
Third, the court dismissed the § 523(a)(2) claim on the alternative basis that even if property was obtained by the defendants, the plaintiff failed to show that the contractor’s fraud was the proximate
Finally, the court found that there was no justifiable reliance by the plaintiff. However, the plaintiff pointed to
Orthopedic Bone Screw Products Litigation
in support of there being justifiable rebanee, and this court distinguished that decision as a matter of degree of the directness of the relationship of the injury to the misrepresentation, not as a totally erroneous legal argument.
Melcher,
C.
In addition, the court concludes that special circumstances would make the application of § 523(d) unjust. As noted by
Wilkett v. ICC,
The legislative history of the provision indicates that this “safety valve” was designed to “insure that the Government is not deterred from advancing in good faith the novel but credible extensions and interpretations of the law that often underlie vigorous enforcement efforts” and to permit courts to rely on “equitable considerations” in denying a fee award. H.R.Rep. No. 1418, 96th Cong., 2d Sess. 11, reprinted in 1980 U.S.Code Cong. & Admin. News 4953, 4984, 4990.
The plaintiff here satisfies at least the first if not both tests for “special circumstances.”
1.
When a party relies on the novelty exception identified in the legislative history, “special circumstances” exist only if the party “advocated not only a novel but also a ‘credible’ extension of existing law.”
Wilkett,
2.
A court’s ability to find “special circumstances” based on “equitable principles” is limited to traditional equitable principles and is not “a license to the bankruptcy judge to base decision on idiosyncratic notions of equity, fair dealing, or ... family justice.”
In re Hingson,
This adversary proceeding was a squabble between neighbors, not the typical § 523(a)(2) fight between a lender and a debtor-borrower. However, under Hing-son, which held that a intra-family dispute was not a special circumstance, treating a neighbors’ squabble as a special circumstance based on its settling a score is inappropriate.
The parties appear to have had similar incomes, and this is not a case of a well funded lender who pursues a § 523(a)(2) claim against an impecunious debtor. In
Pisano v. Verdon (In re Verdon),
Nevertheless, there are obvious instances in which special circumstances do exist under traditional equitable principles.
See Oguachuba v. INS,
One equitable principle arguably applicable here is that of a lack of fair notice. From the plaintiffs perspective she did not view the defendants’ conduct as incurring debt for personal household purposes, such as to make this a “consumer debt,” but as the infliction of injury on her for the defendants’ financial gain. That she would reasonably not have viewed § 523(d) as being applicable, particularly when the defendants failed to invoke § 523(d) in their answer, is arguably a special circumstance which warrants not imposing the sanction of attorney’s fees against her.
Cf. United States v. Norton,
This proceeding additionally included a count under § 523(a)(6), a claim to which § 523(d) is inapplicable, and the plaintiff did not violate F.R. Bankr.P. 9011 in pursuing that claim. Accordingly, a special circumstance making an award of fees unjust does exist to the extent that non-recoverable fees would have been incurred in battling the § 523(a)(6) even had the § 523(a)(2) count not been asserted.
See Middlefield Banking Co. v. Kassoff (In re Kassoff),
IV
The defendants seek $85.76 in costs, but $20.00 of that represents a Federal Express charge. Because such a charge is not among the expenses enumerated in 28 U.S.C. § 1920, it is not a taxable cost. The plaintiff does not contest the defendants’ entitlement to recover the remaining $65.76 in costs.
V
An order follows.
Notes
. 11 U.S.C. § 523(d) states in full:
If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney's fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
.
See Keasler v. United States,
. This is not a case of a party other than the debtor having been willing to undertake the litigation on behalf of the debtor without charge to the debtor.
See In United States v. 27.09 Acres of Land in Town of Harrison,
. Analogously to Norton, under § 523(d) uncertainty as to the underlying merits of whether the debt was dischargeable is relevant because it affects whether the creditor’s position was substantially justified.