The Eleventh Circuit narrowly read a Florida fee-shifting statute to bar recovery of attorneys’ fees in an avoidance action unsuccessfully brought by a debtor incorporating state fraudulent transfer law under Section 544(b)(1).
Florida law allows a successful “creditor” to recover attorneys’ fees in a fraudulent transfer suit. In the Eleventh Circuit appeal, the unsuccessful plaintiff was a debtor, not a creditor, and thus was precluded from recovering the cost of defense, the appeals court said in a nonprecedential, per curiam opinion on August 15.
The Unsuccessful Fraudulent Transfer Suit
Several years before bankruptcy, the debtor purchased a hotel from the seller for more than $6 million. After filing in chapter 11, the debtor sued the seller under Florida’s fraudulent transfer statute, incorporated by Section 544(b)(1). The subsection allows a trustee to “avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim . . . .” [Emphasis added.]
Because the allegedly fraudulent transfer occurred more than two years before bankruptcy, the debtor utilized the powers of a trustee under Section 544(b)(1) to assert the claim under Florida’s fraudulent transfer statute.
The seller prevailed in bankruptcy court, defeating the fraudulent transfer suit. The district court affirmed, as did the Eleventh Circuit on further appeal.
The seller then moved in bankruptcy court to recover almost $400,000 in attorneys’ fees under a Florida fee-shifting statute. State law allows a prevailing party to recover attorneys’ fees in “any civil action for damages.”
Bankruptcy Judge Erik P. Kimball of West Palm Beach, Fla., denied the motion, ruling that the state’s fee-shifting statute did not apply because the debtor’s suit was under federal law, not state law. The district court affirmed, prompting the seller’s appeal to the Eleventh Circuit.
The Claims Were Federal, Not State
The circuit court began by holding that a state’s fee-shifting statute may “sometimes” apply in bankruptcy cases, because the fee-shifting statute is “substantive law” that can govern in bankruptcy cases.
Citing Eleventh Circuit precedent, the panel said that “the Florida statute applies in bankruptcy proceedings for money damages governed by Florida state law.”
On the other hand, the panel said, the state’s fee-shifting statute “does not apply to bankruptcy proceedings governed by federal law.” [Emphasis in original.] Furthermore, the panel said, “federal courts cannot shift attorney’s fees absent statutory or contractual authority or without invoking their inherent authority to sanction bad faith efforts by one party.”
Although Florida’s fraudulent transfer law was at the root of the lawsuit, the panel explained why the avoidance action was actually under federal law.
Section 544(b)(1) permits a trustee to recover a transfer that is voidable “by a creditor holding an unsecured claim.” [Emphasis added.] Intending to recover the amount of the transfer, the debtor invoked power under the Florida statute alongside Section 550(a), which permits the recovery of the value of an avoided transfer.
“But notwithstanding” citation of state law, the panel said that the debtor “pled causes of action that only could have arisen under the federal statutes.”
With regard to avoidance, the panel noted that a debtor in possession or a trustee can avoid a transfer that is avoidable “by a creditor.” Similarly, the state fraudulent transfer statute permits avoidance only by a creditor.
With regard to recovery, Section 550(a) allows a debtor to recover from the initial transferee, but state law permits recovery only by “a creditor.” In other words, federal law would permit the debtor to recover, but state law only permits recovery by a creditor.
The panel therefore held that the debtor
was not a creditor, so it had no ability to seek avoidance or recovery under the Florida laws it cited. The only law that governed its claims was federal. And because federal law governed the adversarial proceeding’s claims, Florida substantive law — including the Florida [fee-shifting statute] — had no role to play.
The seller argued that the incorporation of state law by Section 544 meant that the case was governed by state law, but the panel noted that the seller cited “no authority in support of the theory.” In fact, the panel found authority that “cuts the other way.”
Holding that the suit was governed by federal law, the panel upheld the lower courts’ refusal to shift fees.
The Eleventh Circuit narrowly read a Florida fee-shifting statute to bar recovery of attorneys’ fees in an avoidance action unsuccessfully brought by a debtor incorporating state fraudulent transfer law under Section 544(b)(1).
Florida law allows a successful “creditor” to recover attorneys’ fees in a fraudulent transfer suit. In the Eleventh Circuit appeal, the unsuccessful plaintiff was a debtor, not a creditor, and thus was precluded from recovering the cost of defense, the appeals court said in a nonprecedential, per curiam opinion on August 15.