MARVIN ISGUR, Bankruptcy Judge.
Fire Safe moves for summary judgment and asks the Court to (i) award Fire Safe legal fees and court costs associated with the bankruptcy proceedings, and (ii) declare such fees, along with sums due and owing in accordance with a Texas state court judgment, nondischargeable in bankruptcy. For the reasons set forth below, the Court holds that:
Fire Safe alleges that on March 25, 2008, Mr. Ayesh, using the false name Jovan Mitch, signed a contract with Fire Safe to obtain fire safety equipment and services for his business, the Royal Beauty Salon. Fire Safe demanded payment of $2,354.44 on March 11, 2009, and Mr. Ayesh never paid.
Fire Safe sued Mr. Ayesh in the Harris County Civil Court at Law on May 18, 2009. The matter went to trial on April 5, 2010, and the court entered judgment on April 8, 2010. (State Court Judgment, Doc. No. 1-5). The court awarded $2,354.44 in actual damages, $11,143.94 in legal fees, prejudgment and postjudgment interest, court costs, and conditional awards of legal fees for state court appeals. The court did not award any exemplary damages, stating:
State Court Trial Tr., Doc. No. 9, at 57.
On August 10, 2010, Mr. Ayesh filed bankruptcy. Fire Safe filed this adversary
Mr. Ayesh moved for summary judgment on January 13, 2011, asserting that the issue of intent to deceive had been fully litigated in state court. (ECF Doc. 11). Fire Safe filed a response on February 4, 2011. (ECF Doc. 2). Mr. Ayesh filed a reply on February 15, 2011. (ECF Doc. 14).
Mr. Ayesh argued the state court's finding that Fire Safe did not prove "an attempt to defraud at the time of the signing of the contract" precluded relitigation of Mr. Ayesh's intent. Fire Safe, Mr. Ayesh argued, was therefore collaterally estopped from litigating the dischargeability of the state court judgment. (ECF Doc. 11, at 4-5). The Court denied Mr. Ayesh's Motion for Summary Judgment because, due to the heightened standard of proof in the state court proceedings, "[t]he issue of Ayesh's intent to deceive ha[d] not been fully and fairly litigated based on a preponderance of the evidence standard. Ayesh's intent [was] an issue of material fact." (ECF Doc. 15 at 6).
Mr. Ayesh's attorney later moved to withdraw, alleging irreconcilable differences with his client. (ECF Doc. 26 at 2). The Court granted this motion on May 9, 2011. (ECF Doc. 27). On June 9, 2011, Fire Safe filed its Motion for Summary Judgment. (ECF Doc. 32). Mr. Ayesh, now representing himself, failed to timely file a response. The Court gave Mr. Ayesh three additional weeks to file a response because of Mr. Ayesh's status as a pro se defendant. Mr. Ayesh filed a general denial answer instead. (ECF Doc. 33). The general denial answer provided no evidence to rebut any of Fire Safe's allegations.
"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). Fed. R. Bankr.P. 7056 incorporates Rule 56 in adversary proceedings.
A party seeking summary judgment must demonstrate: (i) an absence of evidence to support the non-moving party's claims or (ii) an absence of a genuine dispute of material fact. Sossamon v. Lone Star State of Tex., 560 F.3d 316, 326 (5th Cir.2009); Warfield v. Byron, 436 F.3d 551, 557 (5th Cir.2006). A genuine dispute of material fact is one that could affect the outcome of the action or allow a reasonable fact finder to find in favor of the non-moving party. Brumfield v. Hollins, 551 F.3d 322, 326 (5th Cir.2008).
A court views the facts and evidence in the light most favorable to the non-moving party at all times. Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th Cir.2009). Nevertheless, the Court is not obligated to search the record for the non-moving party's evidence. Malacara v. Garber, 353 F.3d 393, 405 (5th Cir.2003). A party asserting that a fact cannot be or is genuinely disputed must support the assertion by citing to particular parts of materials in the record, showing that the materials cited do not establish the absence or presence of a genuine dispute, or showing that an adverse party cannot produce admissible
"The moving party bears the burden of establishing that there are no genuine issues of material fact." Norwegian Bulk Transp. A/S v. Int'l Marine Terminals P'ship, 520 F.3d 409, 412 (5th Cir.2008). The evidentiary support needed to meet the initial summary judgment burden depends on whether the movant bears the ultimate burden of proof at trial.
If the movant bears the burden of proof on an issue, a successful motion must present evidence that would entitle the movant to judgment at trial. Malacara, 353 F.3d at 403. Upon an adequate showing, the burden shifts to the non-moving party to establish a genuine dispute of material fact. Sossamon, 560 F.3d at 326. The non-moving party must cite to specific evidence demonstrating a genuine dispute. Fed.R.Civ.P. 56(c)(1); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The non-moving party must also "articulate the manner in which that evidence supports that party's claim." Johnson v. Deep E. Tex. Reg'l Narcotics Trafficking Task Force, 379 F.3d 293, 301 (5th Cir.2004). Even if the movant meets the initial burden, the motion should be granted only if the non-movant cannot show a genuine dispute of material fact.
If the non-movant bears the burden of proof of an issue, the movant must show the absence of sufficient evidence to support an essential element of the non-movant's claim. Norwegian Bulk Transp. A/S, 520 F.3d at 412. Upon an adequate showing of insufficient evidence, the non-movant must respond with sufficient evidence to support the challenged element of its case. Celotex, 477 U.S. at 324, 106 S.Ct. 2548. The motion should be granted only if the nonmovant cannot produce evidence to support an essential element of its claim. Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 197 (5th Cir.2005).
In order "[f]or a debt to be nondischargeable under section 523(a)(2)(A), the creditor must show (1) that the debtor made a representation; (2) that the debtor knew the representation was false; (3) that the representation was made with the intent to deceive the creditor; (4) that the creditor actually and justifiably relied on the representation; and (5) that the creditor sustained a loss as a proximate result." In re Mercer, 246 F.3d 391, 403 (5th Cir. 2001). The burden of proof is by a preponderance of the evidence. Id.
When an issue was previously litigated under state law, "a bankruptcy court will apply the law of collateral estoppel of the relevant state." Collier on Bankruptcy ¶ 523.06 (16th ed.) (citing Gayden v. Nourbakhsh (In re Nourbakhsh),
The state court found Mr. Ayesh signed the contract with Fire Safe using the false name Jovan Mitch. (ECF Doc. 9 at 54-55). This issue was actually litigated, it was essential to the prior judgment, and it is identical to an issue in the pending action. Collateral estoppel therefore applies.
There is no genuine issue of material fact that Mr. Ayesh made the false representation with the intent to deceive Fire Safe. Mr. Ayesh signed the contract using a false name. Mr. Ayesh offered the Court no explanation why he did so. Indeed, Mr. Ayesh continues to deny he signed the contract. (ECF Doc. 32-10). These facts are sufficient under a preponderance standard to shift the burden to Mr. Ayesh to establish a genuine issue of material fact that, even though he signed using a false name, he lacked the intent to deceive Fire Safe at the time he entered into the contract. Mr. Ayesh produced no evidence in this regard and failed to establish a genuine issue of material fact.
There is likewise no genuine issue of material fact that Fire Safe justifiably relied on the representation
As the Court finds Mr. Ayesh's false representation results in an exception from discharge of his debt to Fire Safe, the issue of actual fraud need not be addressed.
As to damages, Fire Safe asks the Court to except from discharge the state court awards of $2,354.44 for fraudulently obtained services, $11,143.94 in legal fees, and interest and costs.
The Bankruptcy Code explicitly exempts from discharge Mr. Ayesh's debt for the services fraudulently obtained from Fire Safe. 11 U.S.C. § 523(a)(2)(A).
The state court awarded legal fees, prejudgment and postjudgment interest, and court costs. (ECF Doc. 32-9). Legal fees and other damages arising from a state court fraud judgment are excepted from discharge when the damages judgment itself is excepted from discharge. See Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) ("[T]he text of § 523(a)(2)(A) . . . encompasses any liability arising from money, property, etc., that is fraudulently obtained, including treble damages, attorney's fees, and other relief that may exceed the value obtained by the debtor.") (emphasis added); Snook v. Popiel (In re Snook), 168 Fed.Appx. 577, 579 (5th Cir.2006).
This case is not as straightforward as Cohen or Snook. In Cohen and Snook, the underlying judgments were based on fraud. The underlying judgment in this case appears to be based on a breach of contract claim.
The Court does find, based on the summary judgment record, that Mr. Ayesh committed fraud under § 523(a)(2)(A). The issue is whether the state court award for legal fees, interest, and other costs (awarded in a breach of contract context) "arise from" Mr. Ayesh's fraud. While a close call, the Court believes these liabilities do "arise from" the fraud Mr. Ayesh perpetrated. They are therefore also excepted from discharge.
The Ninth Circuit dealt with this issue in In re Sabban, 600 F.3d 1219 (9th Cir. 2010). Sabban, majority interest holder of a general partnership, falsely represented to a homeowner he was licensed by California's Contractors State License Board. Id. at 1220. The homeowner relied on this false representation, entered into home remodeling contracts with Sabban, and sued Sabban when problems arose. Id. After dismissal or withdrawal of all other claims, the homeowner proceeded under §§ 7160 and 7031(b) of the California Business &
In reaching this conclusion, the Ninth Circuit rejected the homeowner's broad interpretation of Cohen. The homeowner read Cohen's "arising from" language to indicate nondischargeability under § 523(a)(2)(A) only requires "cause in fact" or "but for" causation. To use the facts from Sabban as an illustration, the homeowner's theory was because the state court award of $123,000 would not exist but for Sabban's false representation that he was a licensed contractor,
Miller v. Lewis from the Eastern District of Texas is a good case to contrast with Sabban. 391 B.R. 380 (E.D.Tex. 2008), aff'd, 307 Fed.Appx. 785 (5th Cir. 2008). Miller committed fraud across the country. Id. at 382. In one scheme Miller, "[holding] himself out as an investment professional, allowed Lewis to invest varying amounts . . . with limits purportedly set by large banks such as J.P. Morgan." Id. Miller did not invest Lewis's money and simply used it as his own. Id. Lewis
The district court affirmed. Id. The district court stated that "[u]nder the Cohen analysis, the entirety of the Arizona judgment is an obvious outgrowth of Miller's fraudulent scheme."
The present case is more akin to Miller than Sabban. In the present case, (1) Mr. Ayesh signed the contract using the false name; (2) this, along with Mr. Ayesh's assertion he was the owner of Royal Beauty Salon, induced Fire Safe to enter into the contract; (3) Mr. Ayesh refused to pay for the services obtained; (4) Mr. Ayesh continues to deny signing the contract even after state court findings to the contrary; and (5) Mr. Ayesh provided the Court with no explanation for the false representation. A state law claim for breach of contract is an "obvious outgrowth"
Fire Safe also asks the Court to both award legal fees and costs for the bankruptcy proceedings and to declare such fees excepted from discharge. The Bankruptcy Code, like other federal statutes, is governed by the "American Rule." In re Nair, 320 B.R. 119, 125 (Bankr. S.D.Tex.2004) (citing Alyeska Pipeline Svc. Co. v. The Wilderness Soc., 421 U.S. 240, 261, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975)). The Supreme Court's holding in Cohen does not indicate § 523(a)(2)(A) provides a possible exception to the normal rule. Creditors "are [only] entitled to recover attorneys' fees in bankruptcy claims if they have a contractual right to them under state law. . . ." Jordan v. Southeast Nat'l Bank (In re Jordan), 927 F.2d 221, 227 (5th Cir.1991) (quoting In re Martin, 761 F.2d 1163 (6th Cir.1985)). The contract submitted to the Court does not indicate Fire Safe is entitled to legal fees or court costs. (ECF Doc. 13-1, 32-2). Fire Safe did not demonstrate to the Court they are entitled to such fees as a matter of contract under applicable Texas law. Rule 56 "does not obligate this court to search for evidence to support a party's motion for summary judgment." Udoewa v. Plus4 Credit Union, 754 F.Supp.2d 850, 861 n. 17 (S.D.Tex.2010) (citing de la O v. Hous. Auth., 417 F.3d 495, 501 (5th Cir. 2005)). Therefore, the Court may not award Fire Safe legal fees and court costs related to the bankruptcy proceedings, much less declare such debts excepted from discharge.
The Court will issue an Order in accordance with this Memorandum Opinion.
