Attorney Fees Held Awardable Under Nevada Fraudulent Transfer Law In Morgan Stanley Opinion

Article 2020 Nevada Attorney_Fees Art200630AttorneyFeesNevadaFraudulentTransferLawMorganStanleyOpinion




Morgan Stanley and related financial companies obtains a judgment against Seven Circle Gaming Corporation ("SCGC") in 2003. Later, the Morgan Stanley plaintiffs sued Hans Jecklin, Swiss Leisure Group ("SLG") and JPC Holding AG ("JPC") and others in a veil-piercing and fraudulent transfer action. After an eight-day bench trial, the U.S. District Court for the District of Nevada held that Jecklin, SLG and JPC were in fact alter egos of SCGC and that they had fraudulently transferred assets. The balance of the defendants won judgment in their favor.

For purposes of this article, the only thing that is important here is that the Court also awarded attorney fees in favor of the Morgan Stanley plaintiffs based on their success in obtained a fraudulent transfer judgment against the SCGC defendants.

The case was tried by the Hon. Richard F. Boulware, II, who is well-known as a very talented and conscientious federal judge in Las Vegas, and who I expect will sooner or later go on to the appellate bench because he is just that good.

In considering Morgan Stanley's attorney fee request, Judge Boulware noted that when a federal court is sitting in diversity jurisdiction, under the so-called Erie Doctrine, state law will normally apply to decide the attorney fee issue, in this case Nevada law. The Silver State here follows what is known as the American Rule, which is that ⸺ in the absence of a statute that specifically authorizes attorney fees ⸺ each party bears their own attorney fees in litigation. This is to be contrasted with the English Rule, which is that the losing party always bears the cost of the winning party's attorney fees.

Nevada follows the Uniform Fraudulent Transfer Act of 1984, which, like its successor the Uniform Voidable Transactions Act of 2014, does not have an express provision that shifts fees from one party to the other ⸺ in fact, neither the UFTA nor UVTA even use the term "attorney's fees" anywhere in their statutory texts. Thus, the SCGC defendants argued that in the absence of such a provision, the American Rule should control, and the Morgan Stanley plaintiffs would simply have to eat their own attorney's fees for bringing their UFTA action.

But Judge Boulware looked beyond this analysis to note that the UFTA does expressly provide the remedy in § 7 (NRS 112.210(1)(c)(3)) of "any other relief the circumstances may require." Thus:

"The Court finds that Plaintiffs are entitled to attorneys’ fees. NRS 112.210(1)(c)(3) permits courts to enter “any other relief the circumstances may require.” This language was taken from the Uniform Fraudulent Transfer Act, and while the Act does not provide explicitly for the award of attorneys’ fees, this provision 'invites courts to consider themselves empowered to award attorney’s fees, punitive damages, or both. Courts in some states have accepted this invitation; courts in other states have declined it.' Kenneth C. Kettering, The Uniform Voidable Transactions Act; or, the 2014 Amendments to the Uniform Fraudulent Transfer Act, 70 Bus. Law. 777, 788 (2015) (citing cases). This Court chooses to accept the invitation. As evidenced by the Court’s order, the circumstances in the instant action require an award of attorneys’ fees, and the Court therefore utilizes its authority provided by NRS 112.210(1)(c)(3) to grant the required relief. The Court does not find that such fees are available in all cases under the Uniform Fraudulent Transfer Act. Rather, the Court finds based upon the facts of this case, including but not limited to the fact that Defendants forced this extensive litigation, that attorneys’ fees represent 'other relief' that the 'circumstances' require here under NRS 112.210."

As an aside, Prof. Kenneth C. Kettering was the reporter to the UVTA drafting committee, and it is interesting to see his sage law review commentary having a positive effect on the interpretation of the UFTA as well. Whether embodied in the Official Comments or not, the musings of the drafting committee reporters for uniform acts carry great weight with the courts in determining how certain issues should be resolved. When it comes to fraudulent transfer law, Professor Kettering's views carry outsized weight as they should.

Back to our case, Judge Boulware did throw the SCGC defendants a small bone with their argument that not all the Morgan Stanley plaintiffs' time was spent on the fraudulent transfer issue, but some of it was solely directed to their alter ego claims for which there is no statutory authorization, express or implied, for attorney fees. Thus, Judge Boulware gave the attorney fees award a 15% haircut, but other granted the Morgan Stanley plaintiffs' motion for attorney fees.

ANALYSIS

The hard takeaway from this case is that attorney fees might, or might not, be awardable in an UFTA/UVTA case under the "any other relief the circumstances may require" language of § 7, depending on whether the courts of a particular state have bought into that argument. That was the decision before Judge Boulware, and, for what it is worth, your writer thinks he reached the correct result.

It should be noted, however, that there are actually two possible basis for awarding attorney fees in a UFTA/UVTA case. The first basis is the "any other relief the circumstances may require" language of § 7, which we have just discussed. This provision is intentionally of very broad and open-ended drafting, and has sometimes been interpreted to the effect that it gives courts what amounts to a carte blanche to fashion remedies. It exists to effectively make the creditor whole from the result of the fraudulent transfer, and it would be simply impossible to predict all the potential circumstances that a court might have to address in making the creditor whole.

The second basis for relief is found in the "Supplementary Provisions" section (UFTA § 10 and UVTA § 12), which provides:

"Unless displaced by the provisions of this [Act], the principles of law and equity, including the law merchant and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause, supplement its provisions."

The import of this section is that the UFTA/UVTA is not to be interpreted or applied in the abstract, but instead must be carefully integrated into the existing scheme of law commensurate with its purposes and strike appropriate balances with the purposes of those other laws.

The reason that this provision is important here is that a state may already have statutory or other authority for allowing a creditor to collect attorney fees against the debtor. The prevailing rule among the states is that if the creditor could collect attorney fees against the debtor for the underlying litigation leading to the judgment, then the creditor can likewise collect attorney fees against the debtor for post-judgment enforcement activity. What the "Supplementary Provisions" section effectively allows is for such a post-judgment award of attorney's fees to be available to an UFTA/UVTA action as well, since a UFTA/UVTA action is fundamentally a post-judgment enforcement procedure.

There are two major differences in how these sections apply. The first difference between the "Supplementary Provisions" section and the "any other relief the circumstances may require" language of § 7, is that the former may allow only an award of attorney fees against the debtor, whereas the latter may allow for an such an award against both the debtor and the transferee. Since the debtor is already not paying on the judgment, and may in fact be broke, the only way that a creditor might actually recoup attorney fees for the fraudulent transfer action is by getting an award for those fees against the transferee.

This, however, brings us to the second difference between the provisions. The application of attorney fees, where available, under other state law for post-judgment enforcement proceedings via the Supplementary Provisions section is generally mandatory, but the "any other relief the circumstances may require" language of § 7 is purely discretionary with the trial court. In other words, a creditor will absolutely get an award of attorney fees (but only against the debtor) under the Supplementary Provisions if allowed by state law, but the creditor only might get the same award against the debtor and/or the transferee, under § 7, depending on which side of the bed the particular judge got up on that morning.

Another way to look at this is to focus on the transferee. The transferee is typically not at risk of attorney fees under the Supplementary Provisions section, but the transferee is at risk under the "any other relief the circumstances may require" language of § 7 depending upon the trial court's exercise of discretion.

It is here suggested that not all transferees should be treated alike for purposes of the "any other relief the circumstances may require" language of § 7. The UFTA/UVTA goes to great lengths to parse transferees into one of two categories: transferees who are in good faith, and transferees who are not in good faith.

Here we come to a digression as to what constitutes a good faith transferee as opposed to a transferee not in good faith. The case law on this subject has evolved to where mere knowledge that the debtor is in financial distress is not enough, but rather for a transferee to not be in good faith essentially requires that the transferee be in cahoots, expressly or implicitly, with the debtor to defeat the rights of a creditor of that debtor.

The UFTA/UVTA treats good faith transferees and transferees not in good faith quite differently: The former get substantial breaks, including a credit for whatever they gave the debtor in return for the transfer, while the latter get no breaks at all and are instead can be treated quite harshly.

Thus, in the Court's application of the "any other relief the circumstances may require" language of § 7, it will generally make sense and be consistent with the overall scheme of the UFTA/UVTA if in the Court's discretion a good faith transferee were not required to pay attorney fees, while a transferee not in good faith should be jointly responsible with the debtor in which that transferee is in cahoots to pay the creditor's attorney fees.

This analysis should apply with equal fervor to conspiracy and punitive damages: It would be wholly consistent with this scheme for a transferee not in good faith, i.e., in cahoots with the debtor, to pay conspiracy and punitive damages where appropriate, but it was not make any sense to tag a good faith transferee ⸺ who by definition is not in cahoots with the debtor ⸺ with such damages.

The present iteration of our fraudulent transfer laws in the form of the UVTA does not expressly address the issues of attorney fees or conspiracy and punitive damages, but maybe it should.

Future drafters should take notice that at the very least these issues are worthy of consideration.

CITE AS

Morgan Stanley High Yield Securities Inc. v. Jecklin, 2020 WL 2770681 (D.Nev., May 28, 2020).









AI Synopsis


♦ This is an analysis of the legal issues surrounding attorney fees in Uniform Fraudulent Transfer Act (UFTA) and Uniform Voidable Transactions Act (UVTA) cases. Here's a breakdown of the key points and some additional insights: (A) Key Takeaways: (1) Attorney Fees in UFTA/UVTA Cases: The analysis highlights that while the UFTA/UVTA doesn't explicitly address attorney fees, courts can award them under the "any other relief the circumstances may require" provision of Section 7. This is a discretionary power, and courts may choose to award fees based on the specific facts of the case. (2) Two Potential Bases for Awarding Fees: (i) Section 7: This provision allows courts to award fees as a remedy to make the creditor whole. (ii) Supplementary Provisions (Section 10/12): These provisions allow courts to apply existing state law principles, including those that permit attorney fee recovery in post-judgment enforcement actions. (3) Distinction Between Debtor and Transferee: The analysis emphasizes that attorney fees may be awarded against the debtor under the Supplementary Provisions, but against both the debtor and the transferee under Section 7. (4) Good Faith Transferees vs. Non-Good Faith Transferees: The article suggests that good faith transferees should not be held liable for attorney fees, while non-good faith transferees (those in cahoots with the debtor) should be jointly liable with the debtor. (5) Conspiracy and Punitive Damages: The analysis extends the argument to conspiracy and punitive damages, suggesting that non-good faith transferees should be held liable for these damages, while good faith transferees should not. (B) Additional Insights: (1) Erie Doctrine: The article correctly points out that federal courts sitting in diversity jurisdiction must apply state law, including state law on attorney fees, under the Erie Doctrine. (2) American Rule vs. English Rule: The American Rule, followed in Nevada, generally requires each party to bear their own attorney fees, while the English Rule requires the losing party to pay the winning party's fees. (3) Professor Kettering's Commentary: The article highlights the influence of Professor Kettering's commentary on the interpretation of the UFTA/UVTA, demonstrating the weight given to the views of drafting committee reporters. (4) Future Drafting Considerations: The article suggests that future drafters of the UFTA/UVTA should consider explicitly addressing attorney fees, conspiracy, and punitive damages to provide clearer guidance for courts. ♦