* District Judge of the Eastern District of Texas, sitting by designation. United States Court of Appeals,

Fifth Circuit.

No. 93-1427.

In the Matter of SOUTHLAND CORP., Debtor.

SOUTHLAND CORP., Appellee-Cross-Appellant,

v.

KILGORE & KILGORE, Appellant-Cross-Appellee.

May 4, 1994.

Appeals from the United States District Court for the Northern District of Texas.

Before JONES and DeMOSS, Circuit Judges and COBB * , District Judge.

EDITH H. JONES, Circuit Judge:

Kilgore & Kilgore represented some of Southland's bondholders in a Texas state court action

for breach of contract. Southland subsequently filed a voluntary Chapter 11 petition and removed

the state court action to the bankru p tcy court. The plaintiffs in the state court action thereafter

assigned their right to recover attorneys' fees under Texas law to Kilgore & Kilgore, and the firm filed

a claim for $28,369.00 in pre-petition legal fees in the Southland bankruptcy.

After confirmation of the Chapter 11 plan, Southland objected to the claim in its Amended

Objection of August 2, 1991. The bankruptcy court allowed the claim, but the district court reversed

on the basis that the firm was not entitled to recover attorneys' fees under Texas law. Finding error

in the district court's interpretation of Texas law, we REVERSE and REMAND for the entry of

judgment based on the bankruptcy court's decision.

I.

As a first level of attack, Kilgore & Kilgore argues that Southland never properly objected

to their claim for attorneys' fees on the particular basis that Tex.Civ.Prac. & Rem.Co de Ann. §

38.001 (West 1986) did not provide for such recovery. Specifically, the law firm appellant maintains

that in its Amended Objection Southland ob ject ed o n only two grounds: lack of standing and1 As to the argument that the Amended Objection listed only two grounds for objection, neither

of which dealt with § 38.001 specifically, "[t]he purpose of filing an objection is to join issue in a

contested matter, thereby placing the parties on notice that litigation is required to resolve an

actual dispute between the parties," In re Simmons, 765 F.2d 547, 552 (5th Cir.1985), and the

Amended Objection certainly satisfied this purpose even if it failed to spell out every theory of discharge under the Chapter 11 Plan. Further, the firm maintains that any objection properly made

by Southland on this basis was set aside by the bankruptcy court at its November 2, 1992 hearing and

never made again. The district court, however, concluded that Southland did object on this particular

basis in its letter brief to the bankruptcy court and in hearings conducted on the claim. We agree.

Southland objected on the basis of § 38.001 at least three times before the bankruptcy court.

At a hearing before the court on the Amended Objection held on July 22, 1992, counsel for Southland

argued at length that the claims should be disal lo wed o n t he basis that they are not "valid claims"

within the meaning of § 38.001. In a letter brief submitted per the bankruptcy court's request, counsel

for Southland again made it perfectly clear that his client objected to the claims in part on the basis

that § 38.001 would not provide for attorneys' fees where judgment had not been secured. Finally,

at t he second hearing on the Amended Objection held on November 2, 1992, counsel once again

reminded the court of Southland's objection that the claim was invalid under Texas law.

Furthermore, the appellant's argument that the bankruptcy court deleted all prior objections

by Southland when he called for a ne w reco rd at the November 2, 1992 hearing is meritless. The

judge opened up the hearing by saying that its purpose was the reargument of issues presented at the

July 22, 1992 hearing, and counsel for Southland repeated the particular objection at the November

2 hearing. Significantly, the bankruptcy court in its order denying Southland's objections to the claim

specifically addressed the validity of the claim under § 38.001, clearly suggesting that the objection

had not been "deleted."

Our conclusion

t hat Southland properly objected is reinforced by the fact that Rule 3007,

which governs objections to claims, provides little guidance as to the form the objection must take

other than specifying that it be in writing and filed with the court. S ee Bankr.R. 3007. The writing

requirement is certainly satisfied here on the basis of the Amended Objection filed with the court on

August 2, 1991 and the letter brief submitted by counsel for Southland on July 29, 1991. 1 In sum,objection. Further, the letter brief certainly spelled out all the various theories of objection, and

its designation as a letter brief does not mean it fails to satisfy the notice requirement of Rule

3007. See id. at 552 & n. 6. the appellant's contention that Southland failed to properly object is without merit.

II.

Under Texas law, "[a] person may recover reasonable attorneys' fees from an individual or

corporati on, in addition to the amount of a valid claim and costs, if the claim is for: ... (8) an oral or

written contract." Tex.Civ.Prac. & Rem.Code Ann. § 38.001 (West 1986) (emphasis added). The

district court interpreted this provision to require the party seeking attorneys' fees to have obtained

a judgment on the claim, and rejected the bankruptcy court's view that the requirements of the Texas

provision were satisfied since the parties—the client-assignors of Kilgore & Kilgore—would have

prevailed in state court but for Southland's voluntary petition in bankruptcy. Upon de novo review

of this question of Texas law, we conclude that the district court's view is wrong, and, furthermore,

that the requirements of § 38.001 are met in this case.

The statutory language nowhere requires a judgment but only a "valid claim." Particularly

compelling is the fact that the requirement that the party obtain a judgment was specifically removed

from the statute in the late 1970's. S ee Corpus Christi Dev. Corp. v. Carlton, 644 S.W.2d 521, 523

(Tex.App.—Corpus Christi 1982, no w rit ). The legislature may have removed the judgment

requirement from the statute at least in part to avoid the inequity of cases where a debtor pays the

plaint iff's claim in full the night before judgment is rendered. S ee, e.g., Villarreal v. Wennermark, 540

S.W.2d 528, 540 (Tex.App.—San Antonio 1976, no w rit) (concl udi ng that statute requi

res a

judgment even where the debtor makes full payment after the suit is filed but before trial commences).

Whatever the reason for the legislature's elimination of the judgment requirement in § 38.001,

ho wever, the cases relied upon by Southland for the proposition that a judgment is st ill

required—notwithstanding the t elling change in statutory language—are inapposite since they apply

only where a party proceeds to trial.

In Huddleston v. Pace, 790 S.W.2d 47 (Tex.App.—San Antonio 1990, w rit denied), the

plaintiff tenant won a jury verdict on its negligence and constructive eviction claims, but lost on its2 Similarly inapposite is Blizzard v. Nationw ide Mut. Fire Ins. Co., 756 S.W.2d 801, 806

(Tex.App.—Dallas 1988, no writ), in which the court held that the plaintiff was not entitled to

attorneys' fees where, although successful on the claim at trial, she had been paid in full before

trial. The plaintiff made a number of claims against her insurance company but the only damages

awarded were for past medical expenses which the carrier had paid as incurred. See id. at 804. breach of lease claim, the latter being the only claim entitling the plaintiff to recovery of attorneys'

fees under § 38.001. See id. at 51. While the court in Huddleston does suggest that a judgment is

required for a claim to be valid under § 38.001, see id., the court was clearly speaking in the context

of suits that proceed to trial. That is, H ud dleston st ands for no more than the proposition that a

"valid claim" does not exist if a party proceeds to trial and loses on that claim.

Further support for this reading of Huddlest one is fo und in that court's citation of C orpus

Chri sti Dev. Corp. v. Carlton, 644 S.W.2d 521 (Tex.App.—Corpus Christi 1982, no writ) as

authority for the proposition that a valid claim requires a judgment. S ee id. Significantly, the court

in Corpus Christi Dev. Corp. specifically identifi ed t he co ntext in which this requirement applied:

"[I]n the context of a suit that goes to trial, a judgment is a co ndit ion precedent to recovery of

atto rneys' fees because a "valid claim' is not established until the plaintiff gets a judgment that is

supported by the pleadings and the proof." C orpus Christi Dev. Corp., 644 S.W.2d at 523 (emphasis

added). In short, H

uddlestone can properly be understood only in light of the limit ed hol ding in

Corpus Christi Dev. Corp.

The rule derived from these two ca ses is of course perfectly consistent with amended §

38.001 and the view of legislative intent suggested above. Properly understood, a valid claim requires

a fi nal judgment where the case proceeds to trial, but does not require one where the case—as

here—does not progress that far, and the underlying claim is uncontested. Attempting to bolster its

view of § 38.001, Southland cites another state case, High Plains Wire Line v. Hysell Wire Line, 802

S.W.2d 406, 410 (Tex.App.—Amarillo 1991, writ ref'd n.r.e.), and two bankruptcy court opinions,

In re Lorenzo Bancshares, Inc., 122 B.R. 270, 272 (Bankr.N.D.Tex.1991), and In re Continental

Airlines Corp., 110 B.R. 276, 281 (Bankr.S.D.Tex.1989), but all three sources involved disputes that

proceeded to trial for determination. These authorities simply bear no direct relevance to the question

of establishing a valid claim where the case does not proceed to trial. 2The court refused to find such a claim "valid" for purposes of attorneys' fees. The facts of the

case before this court clearly are not analogous, since the bondholders had to sue Southland

initially in state court. Alt ho ugh t he district court misinterpreted § 38.001, the next level of inquiry necessarily

focuses on the bankruptcy court's view that the requireme nt s o f t he Texas provision are satisfied

because the bondholders—the client-assignors of Kilgore & Kilgore—would have prevailed in state

court but for the bankruptcy petition. The view that t he parties would have prevailed but for the

reorganization rests on the fact that the bondholders' claims were paid pursuant to So uthland's

reorganization plan. While obviously not the technical equivalent of a st at e co urt judgment, the

r eco gnit io n o f claims pursuant to a Chapter 11 plan is analogous for purposes of § 38.001. C f.

Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1054 (5th Cir.1987) (concluding that a confirmation

order is a final judgment for res judicata purposes). After all, the plan discharged Southland's liability

to the bondholders—among many other claims—in an order that was final and appealable. In short,

the district court's analysis is inconsistent with the amended language of § 38.001 and the subsequent

case law, and the appellants have a "valid claim" under § 38.001.

III.

The conclusions reached above require us to address the merits of Southland's cross-appeal,

which complains that the bankruptcy court erred in treating the Kilgore & Kilgore claim as a general

unsecured claim under the plan of reorganization. Southland maintains that the law firm's claim is

merely derivative of the original bondholders' claims; as such, the claim for at t o rneys' fees was

satisfied and discharged by the specific treatment provided for the underlying bon dholders' claims

under the plan. Southland argues that Kilgore & Kilgore cannot complain now since the plan—which

did not provide additional distribution amounts to the bondholders on account of attorneys' fees—was

filed before the assignment to the firm, and no objection was made at that time. In essence,

Southland contends t hat because its plan did not provide for the type of claim filed by Kilgore &

Kilgo re, and because Kilgore & Kilgore failed to realize the "true nature" of its claim, Kilgo re &

Kilgore may recover nothing from the confirmed plan. This contention makes up in brazenness what

it lacks in equity. We reject it.3 For example, if Kilgore & Kilgore had taken an assignment of bonds rather than the claim for

attorneys' fees, its claim would have to fall within the bondholders' class.

4 The Plan provided these bondholders with the following specific treatment for the Class 6 and

Class 8 claims set forth in the Plan as confirmed:

3.06 Class 6—Old Senior Subordinated Notes. Class 6 consists of all

claims of holders of Old Senior Subordinated Notes.

3.08 Class 8—Old Subordinated Debentures. Class 8 consists of all

claims of holders of Old Subordinated Debentures.

5.03 Old Senior Subordinated Notes. Each holder of an Allowed Claim

in Class 7 will receive for each $1,000 principal amount of such Claim and all

accrued and unpaid interest thereon, subject to the provisions of Section 6.10

hereof, $650 principal amount of New First Priority Debentures, 7.5 New

Warrants and 40.5 shares of Common Stock on or before the date which is ten

Business Days after the later of (a) the Effective Date, and (b) the date such Claim

becomes an Allowed Claim. Any holder who would otherwise be entitled to

receive a fractional share will instead receive a whole share.

5.05 Old Subordinated Debentures. Each holder of an Allowed Claim in

Class 6 will receive for each $1,000 face amount of such Claim and all accrued

and unpaid interest thereon, subject to the provisions of section 6.01 hereof, either

(i) $500 principal amount of New Second Priority Series A Debentures, 6 New

Warrants and 28 shares of Common Stock or (ii) if the holder of such Allowed

Claim makes a timely election after confirmation of the Plan, $250 principal First, by virtue of the assignmen t , Kilgo re and Kilgore had a claim separate from the

underlying bondholders' claims. Under Texas law, all or part of a plaintiff's cause of action may be

assigned—including rights to the recovery of attorneys' fees. S ee Adams v. Petrade Int'l., Inc., 754

S.W.2d 696, 721-22 (Tex.App.—Houston [1st Dist.] 1988, no writ). Thus, when the post-petition,

but pre-confirmation assignment was made to Kilgore & Kilgore, the firm received a claim recognized

as distinct under state law. Although "derivative" in the sense that the validity of the claim depended

on the discharge of the underlying bondholders' claims, see part II supra, the claim for attorneys' fees

is distinct from the underlying claims on the bonds themselves.

To say this is not, however, to suggest that Kilgore & Kilgore automatically had the right to

file a claim that would be classified among the plan's general unsecured claims rather than among the

claims of the bondholders from which it derived. The treatment of Kilgore & Kilgore's claim must

be determined by the language of the plan itself. 3 Plainly, as Southland states, the plan excludes

bondholders' attorneys' fees from the claims covered and discharged under the bondholders' class. 4amount of New Second Priority Series C Debentures and 28 shares of Common

Stock, in each case on or before the date which is ten Business Days after the later

of (a) the Effective Date, and (b) the date such Claim becomes an Allowed Claim.

Any holder who would otherwise be entitled to receive a fractional share will

instead receive a whole share.

From this language, it is evident that no class 6 or 8 claimant could be paid except

upon proof of the amount of bonds he held. Further, no claims were provided for other

than claims based on the principal amount of the bonds.

5 Southland could have avoided treating Kilgore & Kilgore as a general unsecured claimant if

its plan had redefined the treatment of the bondholders' claims, e.g., by creating a sub-class based

on bondholders' attorneys' fee claims, or by calculating each bondholder's rights with reference to

each $1,000 of allow ed claim in addition to or instead of each $1,000 principal amount of such

claim. See note 4 supra.

6 Southland presents two additional, little developed arguments on cross-appeal which merit

little attention. The first of these is that the assignment—the propriety of which Southland does

not dispute—did not give the firm/claimant any right to recovery greater than the original security

holders. This proposition is unassailable, but certainly inapposite since the original security

holders—as a matter of Texas law—would have been entitled to attorneys' fees. The second

complains of the burden of proof allocation by the bankruptcy court, but our review of the

bankruptcy court's order allowing the claim reflects an appropriate application of burdens. Plainly, the Plan also contains a catch-all Class 4B, which included "all unsecured Claims of Creditors

(as such term is defined in Section 101(9) of the Bankruptcy Cod e) against the company ..." The

terms of Kilgore & Kilgore's assignment and the nature of its unsecured debt permit it to fall within

Class 4B, as the bankruptcy court held.

What Southland really quarrels with is therefore not the pro cedure utilized by Kilgore &

Kilgore so much as t he wo rding of Southland's own plan. The plan effects a perhaps anomalous

treatment of this assigned claim, but we emphasize that that consequence follows only because of the

particular way in which the plan defined and limit ed the bondholders' right s

. 5 Because Kilgore &

Kilgore, upon reading the plan, could easily fit its claim within the unsecured Class 4B, while just as

easily determining that its claim was specifically excluded from treatment with the bondholder class,

it did not have reason to object to the Plan. Southland thus cannot argue that Kilgore & Kilgore had

a duty to object to its facially favorable classification under the Southland plan. 6

IV.

For the foregoing reasons, we REVERSE the judgment of the district court and REMAND

for entry of judgment based on the bankruptcy court's decision.. . . . .