Source: http://www.dcba.org/mpage/vol240512art4
Timestamp: 2018-01-22 16:36:50
Document Index: 687499395

Matched Legal Cases: ['§523', '§523', '§523', '§523', '§523', '§ 523', '§ 523', '§523', '§ 523', '§523', '§523', '§523', '§523', '§523', '§523', '§523', '§523', '§523', '§523', '§523', '§101', '§523', '§523', '§727', '§1328', '§ 523', '§ 523', '§1328', '§ 523']

Dischargeable and NonDischargeable Divorce Related Attorney Fees in Bankruptcy
Abraham Lincoln is widely quoted as saying that, “A lawyer’s time and advice are his stock in trade”. As such, it is reasonable to assume that a lawyer should be compensated for providing his or her services.
Juxtapose these maxims with the desire of a bankruptcy debtor to receive a discharge of debt and you have an uncomfortable combination of opposing forces. Such is the reality of many a family law practitioner or other attorney unlucky enough to have outstanding accounts receivable due from a client who is facing financial distress.
Typically, attorney fees are dischargeable in bankruptcy cases. However, attorney fees related to family law matters may not be dischargeable under certain circumstances. The Bankruptcy Code[1] excepts from discharge various debts. The amendments to the code in 2005 expanded these categories and recent case law has clarified their application to family law attorneys.
Bankruptcy Discharge and Exceptions to Discharge. Ultimately, a bankruptcy debtor is seeking to get a discharge of debt. The debtor is insolvent and needs relief. Perhaps the causal factor is income reduction, job loss, uninsured medical expenses or perhaps the inability to budget income and expenses. Often the triggering event is the dissolution of marriage.
Consumer debtors have two choices. They can file Chapter 7 and get a fresh start or they can file Chapter 13 and enter into a repayment plan. Chapter 7 cases are about four months long and the debtor does not make payments to creditors. Chapter 13 cases may last from 36 to 60 months and require monthly payments according to a plan of repayment. Most consumer debts (e.g. credit cards, medical bills, utility bills, repossession debt, attorney fees, foreclosure deficiency) are dischargeable in either a Chapter 7 of Chapter 13 bankruptcy.
Not all debts are dischargeable in bankruptcy. Some debts are excepted from discharge for various public policy reasons.[2] The good news for family law practitioners (and bad news for debtors) is that the law is trending toward expanding the non-dischargeability of divorce related debts, including attorney fees.
Effect of the Bankruptcy Discharge. Section 524 of the Bankruptcy code provides in relevant part that: “(a) A discharge in a case under this title (1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived; (2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; . . . .”[3]
The effect of a bankruptcy discharge is an injunction against collection of a discharged debt. Section 524 defines prohibited conduct against a discharged debtor and explains what is being discharged. On it’s face, section 524 appears to be a broad discharge, including attorney fees owed by a bankruptcy debtor, whether they are in the form of a claim for fees (e.g. pursuant to a written retainer agreement) or whether they have been reduced to a judgment.
Debts Excepted from Discharge. The Bankruptcy Code also excepts various debts from discharge; mainly for public policy reasons. Debts owed for fraud, taxes, student loans, child support, alimony, embezzlement, criminal fines, restitution are all non dischargeable. So too are various debts relating to family law, separation and dissolution of marriage. The relevant sections of the Bankruptcy Code are §523(a)(5) and (a)(15).
Family Law Exceptions to Discharge: Domestic Support Obligations. A debt owed for Domestic Support Obligations is not discharged in bankruptcy pursuant to 11 U.S.C. §523(a)(5). That section provides in pertinent part that:(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-- . . . . . (5) for a domestic support obligation . . . .”
The Bankruptcy Code defines Domestic Support Obligation in section 101(14A). That section provides:“The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is—(A) owed to or recoverable by—(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or (ii) a governmental unit; (B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated; (C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—(i) a separation agreement, divorce decree, or property settlement agreement;(ii) an order of a court of record; or (iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and (D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.”[4]
Thus, a bankruptcy debtor attempting to obtain a discharge of debt will be prohibited from discharging alimony, maintenance and child support payments, provided they fall within the definition of Domestic Support Obligations. Furthermore, Section 523(a)(5) applies to discharges under both Chapter 7 cases and Chapter 13 cases.[5]
Lastly, debts for Domestic Support Obligations are non-dischargeable without being subject to the time limitations of Federal Rule of Bankruptcy Procedure 4007. That rule requires certain objections to discharge to be filed within the 60 days following the meeting of creditors held pursuant to 11 U.S.C. 341. No adversary complaint is required to be filed by any deadline.[6]
Family Law Exceptions to Discharge: Debts Incurred in a Divorce Proceeding. Debts relating to a family law matter, but not in the nature of a Domestic Support Obligation may also be non-dischargeable in bankruptcy. Section 523(a)(15) states in pertinent part that: “(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt- . . . . (15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit . . . .”[7] Therefore, if the debt is not a Domestic Support Obligation covered by section 523(a)(5), but was incurred by the debtor in a divorce or separation and owed to either a spouse, former spouse or child of the debtor and it, it is non-dischargeable under §523(a)(15).
However, Section 523(a)(15) applies to discharges under only Chapter 7 cases and not under Chapter 13 cases. A debtor in a Chapter 13 bankruptcy case can discharge debts that fall under §523(a)(15).[8] As with a Chapter 7 case, a creditor is not bound by a time limitation to file an adversary action under §523(a)(15).[9]
To summarize the breadth of non-dischargeability of family law debts under the Bankruptcy Code, one influential commentator stated, “Essentially, the combination of amended §§ 523(a)(5) and (15) would be to exclude from discharge all marital and domestic relations obligations, whether support in nature, property division, or hold-harmless, provided that they were incurred in the course of a divorce or separation or established in connection with a separation agreement, divorce decree, or other order of a court of record or a determination made in accordance with state or territorial law by a governmental unit.”[10]
It is clear that certain family law debts are non-dischargeable in bankruptcy. But how does that affect the attorney fees claims of a family law practitioner? The best way to answer this question is to look at some case law interpreting the statutes.
Debt Owed for Attorney Fees to Attorney from Own Client. A debt owed to the family law attorney by a client or former client that has now filed bankruptcy is dischargeable in all circumstances. The Seventh Circuit decided this issue in the case of In re Rios.[11] The court in Rios held that attorneys’ fees owed by the debtor-client were not excepted from discharge under § 523(a)(5).
The court considered the claim of an attorney who provided services to her client in an effort to obtain child support. The court collected cases and determined that §523(a)(5) did not apply to the contractual obligation between the debtor and her former attorney, despite the nature of the action being one to collect child support on behalf of the client.[12]
In the case of In re Alexander Miceli[13], former United States Bankruptcy Judge John H. Squire cited Rios favorably, putting a fine point on the issue, stating “Clearly, under Rios, a debtor’s own attorneys’ fees incurred in a pre-petition state court domestic relations dispute, which remain unpaid as of the time the debtor files a bankruptcy petition, are not excepted from discharge under § 523(a)(5).”[14]
While fees owed to by client in bankruptcy are treated as a contractual obligation and thus dischargeable, there may exist a rationale for a determination of non-dischargeability based other provisions of §523. For instance, if it can be shown that the client/debtor never intended to pay the fees, the debt may fall under one of the various fraud provisions, such as section 523(a)(2)(a). In that section, the Bankruptcy Code excepts from discharge debts incurred for false pretenses, false representations or actual fraud.
This was the result in the case of In Re Bucciarelli.[15] In Bucciarelli the creditor/attorney was able to show that the debtor fraudulently induced the attorney to work on the divorce case, all the while intending to discharge the debt in a bankruptcy case. The court held the debt was non-dischargeable.
Debt for Attorney Fees Owed by Debtor to Spouse or Former Spouse. If a bankruptcy debtor owes attorney fees that were ordered to be paid to the spouse/former spouse, those fees may be non-dischargeable in bankruptcy. If the shifted fees are characterized as a Domestic Support Obligation under §523(a)(5), then there should be little room for the Debtor to attempt to have them discharged. However, the debt can also be of the type contemplated by §523(a)(15); as a debt incurred during a family law proceeding. As such the debt would still be non-dischargeable in a Chapter 7 case. But, as analyzed above, a debt under 523(a)(15) can be discharged in a Chapter 13 case. The characterization of the debt becomes an important question. In making that determination, courts look at many factors.
First, federal bankruptcy law, not state law, is the standard for determination of whether a debt is in the nature of alimony, maintenance or support.[16] Courts making this determination will look beyond labels imposed by the parties or state law and look to the substance of the obligation.[17] State law is not irrelevant and the court may consider it for guidance.[18] The determination rests on whether the obligation was intended as an equalization of property rights or as support and maintenance.[19]
In the case of In Re Leroy[20], the court stated the following factors considered by courts in the determination include the following: “(1) whether the obligation terminates upon the death or remarriage of either spouse (termination of the obligation indicates the obligation was for support); (2) whether the obligation is payable in a lump sum or in installments over a period of time (obligation spread over time indicates the obligation was for support); (3) whether the payments attempt to balance the parties\' income (payments to balance income indicate the payments were for support); (4) the characterization of the obligation in the decree (obligations described as support indicate the obligation was for support); (5) the placement of the obligation in the decree (obligations under the heading support indicate the obligation was for support); (6) whether there is any mention of support payments (separate mention of support payments indicates the obligation is not for support); (7) whether there are children who need support (if children are of the age when support is required, this indicates the payments may be for support); (8) whether there is a large differential in net income (a large differential in income would indicate the payments were for support); (9) whether the obligation was thought to be taxable to the recipient (payments thought to be taxable indicate the payments were for support); and (10) waivers of maintenance.”[21]
The court will use these factors to decide whether the parties intent was to provide support or to divide marital property or debts.[22] Depending on the characterization, the debt for attorney fees owed to your client will either be non-dischargeable in both a Chapter 7 and Chapter 13 case (for debts falling under §523(a)(5) of dischargeable in Chapter 13, but not in a Chapter 7 (for debts falling under §523(a)15).
Debt for Attorney Fees Owed to Your Firm by Spouse or Former Spouse. Often times the attorney fees owed by one party to the divorce will be shifted to the other spouse. When that is the case, it is not uncommon to have the debt payable directly to the law firm representing the other spouse. In a case from the Northern District of Illinois, Aldrich v. Papi,[23] Judge Black pondered the question of attorney fees owed by the debtor to the law firm of the former spouse.
The court was asked to decide whether the former spouse’s attorney had standing to pursue a claim of non-dischargeability under §523(a)(5). The main issue was that the plain language of §523(a)(5) only applied to debt that is either owed to or recoverable by the debtor's spouse, former spouse, or child. Since the plaintiff was the former spouse’s attorney, the debtor/defendant claimed the debt should be dischargeable.
Judge Black collected cases and engaged in a thorough analysis of the issues. He found that the overwhelming majority of courts deciding the issue specifically rejected a strict plain language interpretation of §523(a)(5) and extended standing to the former spouse’s attorney. Furthermore, Judge Black concluded that the nature of the debt was that of support and thus the debt fell under the definition of a Domestic Support Obligation under section 523(a)(5).[24] The Papi case illustrates that attorney fees that are in the nature of support and owed to you or your firm by the former spouse of your client are not dischargeable in bankruptcy pursuant to §523(a)(5).
While the court is likely to conclude that such fees are in the nature of support, practitioners should establish a record from the state court to support that conclusion. When the characterization is not clear, other courts have determined that attorney fees can be held non-dischargeable under §523(a)(15) as debts incurred during a divorce matter.[25] Again, the distinction makes a difference because debts that fall under section 523(a)(15) can be discharged in Chapter 13, but not in Chapter 7.
Conclusion. Attorneys cringe when they receive notice that their client is filing bankruptcy. In most cases, any debt owed for attorney fees will be discharged in either a Chapter 7 or Chapter 13 bankruptcy case. Some debts are not dischargeable for public policy reasons, including certain debts related to alimony, support or other debts incurred in the course of a family law proceeding. Fees owed to an attorney by their own client and incurred in a family law matter are dischargeable in bankruptcy, unless fraud of some other exception to discharge applies. If a bankruptcy debtor is seeking to discharge attorney fees owed to a former spouse or the attorney of the former spouse, then they are likely to be non-dischargeable under 11 U.S.C. §523(a)(5) or (a)(15).
[1] All references to the Bankruptcy Code refer to Title 11 U.S.C.§101 et al.
[2] See generally 11 U.S.C.§523(a).
[3] 11 U.S.C.§523(a).
[4] 11 U.S.C. 101(14A).
[5] See 11 U.S.C.§727(b) and §1328(a)(2).
[6] 11 U.S.C. § 523 (c)(1).
[7] Id. at § 523(a).
[8] 11 U.S.C.§1328(a)(2) does not include section 523(a)(15) as an exception to the chapter 13 discharge.
[9] 11 U.S.C. § 523 (c)(1).
[10] Hon. William Houston Brown & Lawrence Ahern III, 2005 Bankruptcy Reform Legislation with Analysis, 32 (2d ed. 2005).
[11] 901 F.2d 71 (7th Cir. 1990).
[13] 2000 WL 1285347 (Bankr.N.D.Ill. 2000).
[15] 429 B.R. 372 (Bankr. N.D. Ga. 2010).
[16] Haas v. Haas (In re Haas), 129 B.R. 531, 536 (Bankr.N.D.Ill.1989); Seidel v. Seidel (In re Seidel), 48 B.R. 371, 373 (Bankr. C.D.Ill.1984).
[17] See Maitlen v. Maitlen (In re Maitlen), 658 F.2d 466, 468 (7th Cir.1981); Doss, Puchalski, Keenan & Bargiel, Ltd. v. Cockhill (In re Cockhill), 72 B.R. 339, 341 (Bankr.N.D.Ill.1987).
[18] Calisoff v. Calisoff (In re Calisoff), 92 B.R. 346, 352 (Bankr.N.D.Ill.1988).
[19] In re Woods, 561 F.2d 27, 30 (7th Cir.1977).
[20] In re LeRoy, 251 B.R. 490 (Bankr. N.D. Ill. 2000).
[21] Id. at 503 (citing In re Woods, 561 F.2d at 29-30); In re Maitlen, 658 F.2d 466 , 468-69 (7th Cir.1981); In re Coil, 680 F.2d 1170, 1172(7th Cir. 1982); Sterna v. Paneras (In re Paneras), 195 B.R. 395, 401-02 (Bankr.N.D.Ill.1996); Wright v. Wright (In re Wright), 184 B.R. 318, 321 (Bankr.N.D.Ill.1995); Daulton v. Daulton (In re Daulton), 139 B.R. 708, 710 (Bankr.C.D.Ill.1992).
[22] Elkhatib v. Elkhatib (In re Elkhatib), 108 B.R. 650, 652 (Bankr.N.D.Ill.1989).
[23] 427 B.R. 457 (Bankr. N.D. Ill. 2010)
[24] Papi at 463.
[25] See In re Prensky, 416 B.R. 406 (Bankr. D. N.J. 2009), Einhorn, Harris, Ascher, Barbarito & Frost, P.C. v. Hernandez (Bankr.N.J., 2010), and In re Kennedy, 442 B.R. 399 (Bankr. W.D. Pa., 2010).
Arthur Rummler is a sole practitioner with an office in Glen Ellyn, Illinois. He concentrates his practice in all phases of bankruptcy, including consumer, business, debtor and creditor cases. Mr. Rummler is a 1987 graduate of the University of Michigan Ross School of Business Administration and a 1991 graduate of the Chicago-Kent College of Law. He is an active member of the DuPage County Bar Association, currently serving as Chairman of the Law Day Committee and Assistant Treasurer.