NF Clean v. Kakal (In re Kakal)NF Clean v. Kakal (In re Kakal)
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 filеd 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 subsequеntly 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
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 tо 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 Kakalsufficient 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 attornеy'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
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,
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 thе dischargeability action. When a bankruptcy
The Bankruptcy Code does not independently provide attorney's fees to a party seeking an exception to discharge. See In re Koukhtiev ,
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) ,
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 is entitled to an award of attorney's fees on the basis of (i) the Texas Civil Practice and Remedies Code and (ii) the Texas Theft Liability Act.
I. Breach of Contract
i. Whether Attorney's Fees are Allowed by Statute
NF Clean claims entitlement to an award of attоrney's fees for breach of contract under Texas Civil Practice and Remedies Code § 38.001(8). (ECF No. 19 at 4). Under § 38.001(8), "[a] person may recover reasonable attorney's fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for ... an oral or written contract." TEX. CIV. PRAC. & REM. CODE § 38.001(8).
There is no question that the contract was breached. Both parties agree that NF Clean and Kakal entered into an oral agreement which required Kakal to purchase and deliver the Truck to NF Clean
Even in cases where a statute or contract provides for attorney's fees, bankruptcy courts have refused to rule that the fees are nondischargeable where the statute or contract was not the basis for denying discharge." See In re Kirk ,
ii. Whether the Attorney's Fees Stem from the Same Basis as the Claim
Similar to the issue before the Court is In re Carter , No. 17-35082,
NF Clean filed this adversary proceeding against Salim Kakal requesting that its debt be held non-dischargeable under § 523(a)(2), (4), and (6). (ECF No. 1 at 3). NF Clean claims that the debt is non-dischargeable because it was a product of (i) false pretenses, false representations, or actual fraud; (ii) fraud or defalcation while acting under a fiduciary duty, and (ii) willful and malicious injury. (ECF No. 1 at 3). On July 9, 2018, the Court agreed in part and found that Salim Kakаl's debt to NF Clean was nondischargeable based on the events that followed Kakal's recovery of the stolen Truck-the act of selling the Truck to a third party, (knowing it belonged to NF Clean) and failing to remit any of the proceeds of sale to NF Clean. (July 9, 2018 Hearing at 11:31 a.m.). Thus, the basis for NF Clean's claim against Kakal is not breach of contract, and therеfore, § 38.001(8) cannot serve as the basis for an award for attorney's fees.
A. Willful and Malicious Breach
NF Clean further argues that Kakal breached his oral agreement willfully and maliciously, and therefore, it is entitled to attorney's fees for the breach. The Fifth Circuit has acknowledged that "[s]ection 523(a)(6) excepts contractual debts from discharge when those debts result from an intentional or substantially certain injury." In re Williams ,
As mentioned previously, the non-dischargeable debt for which Kakal is responsible stems not from the breach of his contractual obligation, but rather from the subsequent sale оf NF Clean's property, which the Court held constituted larceny and embezzlement under § 523(a)(4) and was willful and malicious under § 523(a)(6). (September 25, 2018 Hearing at 11:31). Accordingly, NF Clean cannot claim entitlement to attorney's fees on the basis of either breach of contract under Texas law or a willful and malicious breach of contract under the Bankruptcy Cоde.
II. Texas Theft Liability Act ("TTLA")
NF Clean alternatively argues that it is entitled to attorney's fees on the basis of the Texas Theft Liability act ("TTLA"). (ECF No. 20 at 2). The TTLA provides a civil cause of action to victims of "theft," as defined by the Texas Penal Code. TEX. CIV. PRAC. & REM. CODE §§ 134.001 -.005. The TTLA allows for the recovery of actual damages from a person who commits "theft," plus up to $1,000 in additional damages, court costs, and reasonable and necessary attorneys' fees.
The provision implicated here is § 31.03, which provides that "[a] person commits an offense if he unlawfully appropriates property with the intеnt to deprive the owner of property." TEX. PEN. CODE § 31.03(a). The Penal Code defines "appropriate" as "to bring about a transfer or purported transfer of title to or other nonpossessory interest in property, whether to the actor or another, or to acquire or otherwise exercise control over property other than real property."
The elements of a cause of action under the TTLA are: (i) the plaintiff had a possessory right to the property; (ii) the defendant unlawfully appropriated property in violation of the Texas Penal Code;
On July 9, 2018, the Court found that the act of selling the Truck to a third party after Kakal regained possession of the stolen Truck, was larceny and embezzlement under § 523(a)(4), and willful and malicious under § 523(a)(6). For purposes of
NF Clean has met its burden of proof under the TTLA. At the time Kakal recovered the stolen truck, NF Clean was the legal and beneficial owner of the Truck. (July 9, 2018 Hearing at 10:52 a.m. (acknowledging it was NF Clean's Truck at the time of recovery) ). Kakal unlawfully approрriated NF Clean's property by selling the Truck to a third party, and NF Clean suffered damages in the amount of $54,255.73 as a result of Kakal's actions. See TEX. CIV. PRAC. & REM. CODE §§ 134.002(2), 134.003 ; see TEX. PEN. CODE § 31.03(a). NF Clean is entitled to an award of attorney's fees under the Texas Theft Liability Act. TEX. CIV. PRAC. & REM. CODE § 134.005. The attorney's fees are excepted from discharge under § 523(a)(4). Sherali ,
Conclusion
In light of the Court's findings, a hearing on the amount of reasonable and necessary attorney's fees that should be awarded will be held on February 14, 2019 at 11:00 a.m.