This matter came before the Court for hearing on June 20, 2017 (the “Hearing”), on the Motion for Attorney’s Fees (the “Motion”) filed the Debtors, the original defendants in the Adversary and the Plaintiff’s Response to Motion for Attorney’s Fees (the “Response”) filed by the plaintiff, McComb Financial, Inc.
McComb Financial is a small finance company that makes consumer loans, usually for amounts less than $5,000.00. On August 23, 2011, Debtor-Wife borrowed $3,802.34 from McComb Financial at an annual interest rate of 34.55%, followed by $5,332.00 on May 15, 2012, at a 34.65% annual rate of interest, $5,633.33 on July 8, 2013, at a 34.62% annual rate of interest, and $4,701.68 on August 19, 2014, at a 33.17% annual rate of interest. The collateral for each of these loans was a 1995 MAGNA Pole Trailer (the “Trailer”), which was titled solely in Debtor Wife’s name.
I. Bankruptcy Case
After Debtor-Wife entered into the four (4) loan transactions as outlined above, the Debtors filed a joint voluntary petition for relief pursuant to chapter 7 of the Bankruptcy Code on November 6, 2015. In their statements and schedules, the Debtors listed McComb Financial as an unsecured creditor with a claim in the amount of $12,792.00. After the chapter 7 panel trustee issued a report stating there was no property available for distribution from the estate over and above that exempted by law, the Debtors were granted a discharged under 11 U.S.C. § 727 on April 11, 2016. On March 6, 2016, prior to the discharge in the Bankruptcy Case, McComb Financial filed the Complaint to Declare Certain Debt Non-Dischargeable (the “Complaint”). The subsequent discharge did not discharge the debt to McComb Financial pending the outcome of the Adversary.
The Complaint named both Husband-Debtor and Wife-Debtor as defendants and alleged that the Trailer had been intentionally destroyed and sold for scrap as early as 2009, before Debtor-Wife first pledged it as collateral. (Compl. at 2). McComb Financial alleged that it relied on Debtor-Wife’s representation “that she had valid and existing collateral” when it made the loans, that Debtor-Wife knew at the time that the representation was false and that she made the false representation with the intent of deceiving McComb Financial, and that it would not have made the loans had it known that Debtor-Wife did not actually possess the Trailer. (Id.). As such, McComb Financial requested that Debtor-Wife’s debt to McComb Financial in the amount of approximately $9,545.71, together with attorney’s fees, interest, and costs, be declared non-dischargeable under § 523(a)(2)(A) and (B), as to both Debtors. With the Court’s permission, McComb Financial filed the Amended Complaint on August 4, 2016, to add fraudulent conveyance as an additional count. McComb Financial did not allege any wrongdoing by Debtor-Husband in the Complaint or in the Amended Complaint. On January 31, 2017, Debtor-Husband filed a Motion to Dismiss, alleging that the Amended Complaint should be dismissed against him for failure to state a claim for relief under Rule 7012 of the Federal Rules of Bankruptcy Procedure. The Court entered the Order on March 22, 2017, holding that McComb Financial failed to plead facts against Kenny Webster in the Amended Complaint that would make the claim against him plausible on its face. Based on the facts plead, relief against Debtor-Husband was not possible because the debt was not owed by Debtor-Husband, and a non-existent debt cannot be held non-dischargeable.
A trial on the adversary was set to take place on June 2, 2017. On May 5, 2017, McComb Financial filed the Plaintiff’s Motion to Dismiss Adversary Proceeding (the “Motion to Dismiss Adversary”). In the Motion to Dismiss Adversary, McComb Financial asserted that an asset search suggested that the recovery of any money from Debtor-Wife was doubtful; therefore, McComb Financial concluded that dismissal would be in the parties’ best interest. The Court entered the Order of Dismissal on May 9, 2017. There is no dispute that the dismissal of the Adversary resulted in the discharge of the debt owed to McComb Financial in the Bankruptcy Case.
The Debtors filed the Motion, alleging that pursuant to § 523(d), they are entitled to reasonable attorney’s fees. Attached as an exhibit to the Motion was the Timesheet. According to the Timesheet, Lee spent 32.1 hours defending the Adversary. At his hourly rate of $200.00 per hour, Lee claimed total attorney’s fees in the amount of $6,420.00, according to the Timesheet.
In the Response, McComb Financial argued that attorney’s fees are not warranted under § 523(d) because the Complaint and the Amended Complaint were substantially justified. According to McComb Financial, the Complaint was filed “after a thorough investigation and was substantially justified.” McComb Financial contended that it had a reasonable basis in law and fact for filing the Complaint, and it had a reasonable expectation that it would prevail. Additionally, because it is a ‘”mom-and-pop finance company, without significant or extensive assets,” McComb Financial argued that the loans it made to Debtor-Wife were “quite large” for such a small company. McComb Financial alleged that because the Trailer had been destroyed prior to the loans, their “conduct amounts to fraud within the meaning of 11 USC [§] 523(a) et seq[.] and shows that the adversary proceeding was well-grounded in law and in fact.”
At the Hearing, McComb Financial called as a witness Anita Wilkinson (“Wilkinson”), its manager. According to Wilkinson, McComb Financial continued to loan money to Helena Webster on the same collateral, even after Wilkinson became suspicious of whether Debtor-Wife possessed the Trailer, because Helena she was current on her installment payments and McComb Financial had the physical title certificate in its possession. Sometime before McComb Financial made the Second Loan in 2012, Debtor-Wife fell behind on her payments. At that point, Wilkinson and her husband attempted to locate the Trailer, but they were unsuccessful.
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