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In re Vandre

United States District Court, D. Colorado

March 16, 2016



Marcia S. Krieger Chief United States District Judge

THIS MATTER comes before the Court on the TC Equity Investments, LLC’s appeal from the United States Bankruptcy Court’s February 5, 2015 Order and Judgment awarding attorney fees and costs to the Jerome Ervin Vandre and Debra Jean Vandre (the Debtors). In reviewing this matter, the Court has considered the designated record and written arguments of the parties, including the Plaintiff’s Opening Brief (#10), the Debtors’ Response (#15), and the Plaintiff’s Reply (#18).[1]

Exercising jurisdiction pursuant to 28 U.S.C. § 158(a), the Court REVERSES AND VACATES the February 5, 2015 Order and Judgment awarding fees and costs to the Debtors.

I. Background

In 2007, TC Equity Investments, LLC (“TCE”) purchased the assets of the Debtors’ HVAC business, known as JV Mechanical, Inc. (JVM). The sale was memorialized in an Asset Purchase Agreement.[2] The Agreement required that the Debtors relinquish and disclose certain customer information to TCE (paragraph 1), and it prohibited the Debtors from competing with TCE for a period of five years within a 50 mile radius (paragraph 13). Sometime later, TCE came to believe that the Debtors had breached the non-compete provision of the Agreement. TCE commenced an action in state court against the Debtors and two entities through which they were purportedly doing business. TCE asserted claims for breach of contract, alter ego liability, violation of the Colorado Consumer Protection Act, unjust enrichment, interference with prospective business advantage, an accounting, and a request for injunctive relief. During the pendency of the action, the two entities were dissolved by the Debtors.

Shortly thereafter, on November 14, 2011, the Debtors filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code, thereby staying the state proceedings against them. The state action against the entities was resolved upon entry of a stipulated judgment against the entities and in favor of TCE. The stipulation contained an admission that the entities breached the Agreement and included a damages award in the amount of $774, 000, plus $15, 641.53 in attorney fees and costs, based on a liquidated damages clause in the Agreement.

In the bankruptcy case, TCE filed a proof of claim in the amount of $789, 641.53, which was based on the judgment obtained in state court. TCE also initiated this adversary proceeding, in which it asserted claims for nondischargeability under 11 U.S.C. § 523(a)(2)(A) and denial of discharge under 11 U.S.C. § 727(a). With regard to the claim under § 523(a)(2)(A), TCE alleged that the Debtors committed actual fraud by inducing TCE to enter into the Asset Sales Agreement with a non-compete provision that the Debtors never intended to perform. TCE alleged that it materially relied on the non-compete provision when entering into the Agreement and its reliance caused it to purchase JVM’s assets for $360, 000 in cash and $46, 775.40 in debt relief.

The Bankruptcy Court bifurcated the § 523 and § 727 claims, and held a trial on the § 523 claim first. The sole issue at trial was whether the Debtors defrauded TCE when they sold their business to TCE in 2007. The Bankruptcy Court issued an oral ruling on August 9, 2013, and reduced its ruling to a written order on August 26, 2013. The Bankruptcy Court found that the Debtors did not deliberately or knowingly mislead or defraud TCE when they sold their business. Further, the Bankruptcy Court acknowledged that whether the Debtors actually breached the Agreement after it was executed was not at issue in the § 523 action, and therefore it did not opine as to that issue. Thereafter, TCE withdrew its claims under § 727.

Having prevailed on the merits, the Debtors moved for an award of attorney fees and costs. They argued that they were entitled to fees and costs under 11 U.S.C. § 523(d), and alternatively, under paragraph 33 of the Agreement. Paragraph 33 of the Agreement provides for fee-shifting in favor of the prevailing party in certain actions:

33. If any party shall commence any action or proceeding against another in order to enforce the provisions hereof, or to recover damages as the result of the alleged breach of any provisions hereof, the prevailing party therein shall be entitled to recover all reasonable costs incurred in connection therewith, including, but not limited to reasonable attorney’s fees.

The Bankruptcy Court held a non-evidentiary hearing and granted the fee motion. The Bankruptcy Court reasoned that § 523(d) did not provide a basis upon which to award fees because the debt in dispute was not a consumer debt. It therefore considered whether the Debtors were entitled to fees under the Agreement. Relying on Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric, 127 S.Ct. 119 (2007), the Bankruptcy Court concluded that the fee-shifting provision of the Agreement was enforceable against TCE. Under the terms of the Agreement, the Bankruptcy Court found that the § 523 proceeding was an action “to recover damages as the result of [an] alleged breach.” Further, the Bankruptcy Court found that the Debtors were the prevailing party on the § 523(a)(2)(A) claim, as well as on TCE’s allegations of breach. The Bankruptcy Court acknowledged that its findings as to an alleged breach of the Agreement were not dispositive as to the § 523 claim, but it noted that it had nevertheless “conclusively” found that the Debtors did not breach the disclosure provision (paragraph 1) of the Agreement.[3]

The Bankruptcy Court held a second hearing to quantify the fee award. On February 5, 2015, the Bankruptcy Court issued an order and judgment awarding the Debtors $74, 004.81 in attorney fees and costs incurred in defending the § 523 claim.[4] Applying the lodestar method, the Bankruptcy Court determined that the hourly rates charged by Debtors’ attorneys were reasonable, but that the amount of time expended by lead counsel was unreasonable. The Bankruptcy Court reduced the fees requested for lead counsel by 20%. It approved in full the amount of costs requested.

TCE appeals from the February 2, 2015 order and judgment awarding $74, 004.81 in fees ...

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