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IN RE WEINSCHNEIDER

March 8, 2004.

IN THE MATTER OF: SIDNEY WEINSCHNEIDER, Debtor SIDNEY WEINSCHNEIDER, Appellant, V. DANIEL HOSEMAN, Trustee of the Estate Appellee


The opinion of the court was delivered by: JOAN GOTTSCHALL, District Judge

MEMORANDUM OPINION AND ORDER

Appellant Sidney Weinschneider ("Weinschneider"), a Chapter 7 debtor, appeals from the bankruptcy court's May 27, 2003 order denying Weinschneider's request for payment of attorneys fees by the bankruptcy estate. Weinschneider moved the bankruptcy court for a fee award to recoup expenses incurred in defending an adversary action for declaratory judgment brought by the Trustee to determine whether Weinschneider's breach of contract action against his former business associates was the property of the bankruptcy estate. Weinschneider alleged that he was entitled to an award of attorneys fees because the Trustee's declaratory judgment action violated the Trustee's pre-existing covenant not to sue Weinschneider. The bankruptcy court denied Weinschneider's fee request, holding that under Illinois law he is not entitled to attorneys fees because (1) the covenant did not expressly provide for the recovery of attorneys fees in the event of breach, and (2) Weinschneider had not otherwise articulated a statutory basis for a fee award. For the reasons stated below, the bankruptcy court's May 27, 2003 order is affirmed.

FACTUAL BACKGROUND

  Sidney Weinschneider filed for bankruptcy under Chapter 11 on October 10, 1989 after his nursing home business experienced financial difficulties. On May 12, 1990, Weinschneider's Chapter 11 case was converted to a Chapter 7 case, and Daniel Hoseman was appointed trustee. In June 1990, the Official Unsecured Creditors Committee filed an adversary action against Weinschneider, demanding that he turn over certain property to the estate, The Trustee, on behalf of the creditors, settled that litigation in 1992.

  In connection with the settlement, in December 1996, the Trustee executed a release and covenant not to sue in favor of Weinschneider. The Trustee agreed to release "all claims, known or unknown, against [Weinschneider, his wife, and certain trusts]." Moreover, the covenant not to sue provided that the Trustee would refrain from "instituting, prosecuting or participating in any suit or action, at law or in equity, or to take any action to collect, enforce or recover on any claim, known or unknown, which the [bankruptcy estate] may, could or [does] have against [Weinschneider, his wife, and certain trusts]." Neither the release nor the covenant expressly provided for the recovery of attorneys fees in the event of breach.

  In the midst of ongoing bankruptcy proceedings, in February 1996, Weinschneider filed a breach of contract action in Illinois state court against his former business associates, claiming a 23 percent ownership stake in their nursing home management operation. Initially, Weinschneider did not inform the Trustee of the lawsuit. On February 27, 1998 — after learning of Weinschneider's state court action — the Trustee brought an adversary complaint against Weinschneider in the bankruptcy court seeking a declaration that Weinschneider's lawsuit was the property of the bankruptcy estate. Weinschneider argued that his state claim arose after he filed for bankruptcy and was, therefore, not part of the bankruptcy estate, and raised the affirmative defense that the Trustee's declaratory judgment action was barred by the release and covenant. In response to Weinschneider's affirmative defense, the Trustee argued that Weinschneider fraudulently induced the execution of the release and covenant by failing to disclose the full extent of his business interests, including his potential breach of contract action. The Trustee argued that, because of Weinschneider's fraudulent inducement, the release and covenant were void,

  At summary judgment, the bankruptcy court ruled that Weinschneider's lawsuit was the property of the bankruptcy estate. The bankruptcy court denied both parties' motions for summary judgment on Weinschneider's affirmative defense, finding disputed issues of material fact about whether Weinschneider misled the Trustee by concealing his lawsuit and providing false or incomplete information in his bankruptcy filings. After trial on those issues, the bankruptcy court ruled in the Trustee's favor on Weinschneider's affirmative defense, holding that the Trustee had proven that Weinschneider fraudulently induced the Trustee's execution of the release and covenant.

  Weinschneider appealed the bankruptcy court's decision to the district court. The district court reversed, holding, inter alia, that the release and covenant not to sue were not fraudulently induced by Weinschneider and that those documents, by their terms, barred the Trustee's suit. The district court consequently entered judgment in favor of Weinschneider. The Seventh Circuit affirmed the district court in Hoseman v. Weinschneider, 322 F.3d 468, 472 (7th Cir. 2003). Following the Seventh Circuit's decision, Weinschneider filed a motion with the bankruptcy court seeking over $500,000 of attorneys fees and costs he incurred in defending the Trustee's declaratory judgment action. On May 27, 2003, the bankruptcy court ruled that Weinschneider was not entitled to recover attorneys fees because (1) there was no provision for an award of attorneys fees in either the release or the covenant and (2) Weinschneider had not otherwise articulated a statutory basis for a fee award.

  ANALYSIS

  The bankruptcy court's decision below was based on purely legal conclusions which the court reviews de novo. See Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir. 1994).

  In his appeal, Weinschneider argues that the bankruptcy court's denial of his fee request was erroneous for two reasons. First, Weinschneider claims that the bankruptcy court should have awarded Weinschneider attorneys fees as damages for the Trustee's breach of the covenant not to sue. Second, alternatively, Weinschneider argues that the bankruptcy court should have found that a fee award was warranted as an "administrative claim" against the estate pursuant to Sections 503 and 507(a)(1) of the Bankruptcy Code. 11 U.S.C. § 503, 507(a)(1), However, neither the covenant nor the Bankruptcy Code entitles Weinschneider to an award of attorneys fees in this case.

  Weinschneider's contract-based fee claim fails under Illinois law because the covenant not to sue makes no express provision for an award of attorneys fees in the event of breach. As the Seventh Circuit has previously found, the covenant not to sue in this case is to be construed under Illinois law. See Hoseman v. Weinschneider, 322 F.3d 468, 473 (7th Cir. 2003). In determining whether to award attorneys fees, the Supreme Court of Illinois has adopted the "American rule," holding that "attorney fees and the ordinary expenses and burdens of litigation are not allowable to the successful party in the absence of a statute, or in the absence of some agreement or stipulation specifically authorizing the allowance thereof." Ritter v. Ritter, 46 N.E.2d 41, 43 (Ill. 1943).

  The Supreme Court of Illinois has not addressed whether attorneys fees are recoverable based on a breach of a covenant not to sue where that covenant is silent on the subject of fees. However, courts applying Illinois law in this context have applied Ritter, holding that a party cannot recover attorneys fees based on another party's breach of a covenant not to sue unless (1) the covenant specifies that attorneys fees are recoverable or (2) there is an independent statutory basis for a fee award. Child v. Lincoln Enters., Inc., 200 N.E.2d 751, 754 (Ill.App. 1964); Isaacs v. Caterpillar, Inc., 702 F. Supp. 711, 714 (C.D. Ill. 1988).

  In his appeal, Weinschneider argues that Child does not accurately reflect Illinois law and points out that courts in certain other jurisdictions allow awards of attorneys fees as damages for a breach of the covenant not to sue regardless of whether the covenant expressly allows such a recovery. See, e.g., Anchor Motor Freight, Inc. v. International Broth, of Teamsters, 700 F.2d 1067 (6th Cir. 1983). However, this court could not find — and Weinschneider does not cite — any decisions under Illinois law that contradict Child. Moreover, contrary to Weinschneider's characterization of Child as an "aberration," the Child holding is consistent with the position of most jurisdictions that attorneys fees are generally not allowed for breach of a covenant not to sue unless the covenant expressly provides for a fee award. See, e.g., Bunnett v. Smallwood, 793 P.2d 157, 161-62 (Colo. 1990); Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (2d Cir. 1966); Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 586 F. Supp. 1286, 1288-89 ...


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