chevron-down Created with Sketch Beta.
May 01, 2020 Feature

Attorney Fees in Bankruptcy

Shayna M. Steinfeld

This article seeks to provide a basic overview of attorney fees in bankruptcy. The author and her husband, Bruce R. Steinfeld, invite you to consult The Family Lawyer’s Guide to Bankruptcy, published by the Family Law Section of the American Bar Association, for a more detailed review of the intersection of bankruptcy and domestic relations.

The ultimate goal of a bankruptcy case is for the debtor, that is, the individual filing a bankruptcy case, to receive his or her discharge. The discharge is the vehicle that enjoins creditors from pursuing collection activities after the bankruptcy case filing. Once the discharge enters, the creditor is thereafter prevented from collecting the discharged debt from the debtor. The discharge is issued under the Bankruptcy Code by chapter, meaning that it is chapter dependent. 11 U.S.C. §§ 727, 1141, 1228, 1328. (Unless otherwise noted, all references are to the Bankruptcy Code, codified at 11 U.S.C. § 101 et seq.) The effect of the discharge is governed by § 524, which applies to all chapters. In summary, as it relates to domestic relations’ obligations, all domestic support obligations remain nondischargeable, that is, due and owing, at the end of the bankruptcy case, from a case filed under any bankruptcy chapter; and all nondomestic support obligations remain due and owing at the end of the bankruptcy case from cases filed under Chapters 7, 11, and 12. The net effect of these provisions is that nondomestic support obligations are dischargeable only in completed Chapter 13 cases. There is an exception where debtors in Chapter 13 cases receive a “hardship” discharge that then mimics Chapter 7, and then the nondomestic support obligation becomes nondischargeable.

Domestic Support Obligations Defined

Support payments due from one spouse to another spouse have, generally speaking, always been nondischargeable under the Bankruptcy Code. Congress, with its changes to the Bankruptcy Code under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, known to bankruptcy attorneys as BAPCPA, passed a number of amendments to the Bankruptcy Code to favor the creditor, ex-spouse of a debtor. These changes included making all divorce-related debts nondischargeable from Chapters 7, 11, and 12 cases, automatically, by virtue of the overlay of 11 U.S.C. § 523(a)(5), (a)(15), and (c).

The Bankruptcy Code defines a “Domestic Support Obligation” (DSO) at § 101(14A) to mean

a debt that accrues before, on, or after the date of the order for relief in a case under this title [11 U.S.C.], 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.

This definition for a DSO is incorporated into § 523(a) to provide that a debtor will not receive discharge under §§ 727, 1141, 1228(a) and (b), or 1328(c) (a hardship Chapter 13 discharge) for a § 523(a)(5) domestic support obligation and under § 523(a)(15) for any debt owed “to a spouse, former spuse, 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 a State or territorial law by a governmental unit” (e.g., any non-DSO domestic-relations-related obligation).

Attorney Fees as Being in the Nature of Support

Generally, attorney fees due to the ex-spouse’s counsel are determined to be in the nature of support, a DSO, and the fee award will be nondischargeable, even though payment may be to a third party rather than to the debtor. The majority rule is that an obligation to pay the spouse’s attorney fees is “so tied in with the obligation of support as to be in the nature of support or alimony and excepted from discharge.” See, e.g., Trentadue v. Gay (In re Trentadue), 837 F.3d 743 (7th Cir. 2016); Strickland v. Shannon (In re Strickland), 90 F.3d 444 (11th Cir. 1996); In re Magill, 33 F.3d 52 (4th Cir.), cert. denied, 115 S. Ct. 1094 (1995) (Court ruled the attorney fees to be nondischargeable even though the nondebtor spouse had previously discharged her liability on the indebtedness); In re Kline, 65 F.3d 749 (8th Cir. 1995); In re Miller, 55 F.3d 1487 (10th Cir. 1995); In re Joseph, 16 F.3d 86 (5th Cir. 1994); Jones v. Jones (In re Jones), 9 F.3d 878 (10th Cir. 1993).

Attorney fees are awarded in the domestic relations–related proceeding under state law, which may break down into various subjects; for example, fees awarded in the underlying divorce; fees awarded during a contempt proceeding; fees awarded during a modification proceeding; fees incurred during family violence proceedings; fees incurred for child support actions; fees awarded for paternity cases; and fees awarded for abuse litigation. In the bankruptcy case, it then becomes important for the bankruptcy judge to understand under what specific provision the attorney fees were awarded in order for the bankruptcy court to layer the applicable bankruptcy law with the fee award. This is most important in Chapter 13 when non-DSO debt is dischargeable. But it may also become relevant if the lawyer is the only party to whom the debt is owed. Practice pointer: Never have the lawyer be the only party to whom the debt is owed. It also may become important if the debt is only for an “injury” that is unrelated to the underlying situation between the family (e.g., an award for sanctions).

Debt that is incurred for or on behalf of a child is, generally speaking, for the support of the child and is considered a DSO, automatically nondischargable pursuant to 11 U.S.C. § 523(a)(5). As an example, if there is a statute solely allowing an award of attorney fees for the modification of child support, along with a statutory scheme for a court to award attorney fees, and an award under such a provision, in state court, requires proof of the actual costs incurred and proof of the reasonableness of those costs, the argument should carry forward in bankruptcy court, or post-bankruptcy discharge back in the domestic relations arena, to include the nondischargeability of such fees under § 523(a)(5). This is also the case if the underlying award for fees in the state court required a showing to the state court judge regarding the “need” of the receiving party for the attorney fees, e.g., a “leveling of the playing field” with findings of fact regarding income and other “support-related” factors that can be utilized in a collateral estoppel manner for a support argument that the fees are, in fact, a DSO.

Notably, in cases where the courts have found that the attorney fees are not “in the nature of support,” courts have generally determined that the obligation has failed the first prong of the DSO test and have focused on the fact that the debt is due directly to the lawyer or firm, rather than to the “spouse, former spouse or child of the debtor.” Other courts have focused on the actual need for the underlying fees or the statute that authorized the state court to award the fee in question in the first place. Post-BAPCPA, some of these cases then hold, at least in the non–Chapter 13 context, that the fees are still nondischargeable under § 523(a)(15). See, e.g., In re Rios, 901 F.2d 71 (7th Cir. 1990); Koch v. Olsson (In re Olsson), 532 B.R. 801 (D. Or. 2015) (attorney fee award was not made on finding of need for support but as a consequence for filing of a meritless motion and was, therefore, not a DSO); Schriner v. Schriner (In re Schriner), 2017 WL 3189865 (Bankr. D. Neb. 2017) (attorney fees were not DSO but were nondischargeable under § 523(a)(15)); In re Milliner, 554 B.R. 525 (Bankr. M.D. Ga. 2016) (debt was not due to spouse, former spouse, or child); Tucker v. Oliver, 423 B.R. 378 (Bankr. W.D. Okla. 2010) (debt for attorney fees was not a DSO because it was awarded to debtor’s former daughter-in-law for a grandchild and, therefore, failed to meet a party requirement under the statutory DSO definitional test); Griefer, LLP v. Prensky (In re Prensky), 416 B.R. 406 (Bankr. D.N.J. 2009) (attorney fees awarded to debtor’s ex-wife were not DSO but were nondischargeable under § 523(a)(15)); In re Orzel, 386 B.R. 210 (Bankr. N.D. Ind. 2008) (fees were not a DSO because they failed the definitional test because they were due to the law firm and were not payable directly to the ex-spouse in a pre-BAPCPA case); Simon, Schindler & Sandberg, LLP v. Gentilini (In re Gentilini), 365 B.R. 251 (Bankr. S.D. Fla. 2007) (fees were due to law firm and the statute of limitation on collecting them had run, so they were now unenforceable against the spouse, and therefore were not a DSO); Offermann Cassano Greco Slisz & Adams, LLP v. Klem (In re Klem), 362 B.R. 585 (Bankr. W.D.N.Y. 2007) (fees were not a DSO but were otherwise nondischargeable under § 523(a)(15)); Loe, Warren, Rosenfield, Katcher, Hibbs & Windsor, PC v. Brooks (In re Brooks), 371 B.R. 761 (Bankr. N.D. Tex. 2007) (fees were not a DSO because they were owed to the firm and, therefore, failed the definitional test for an entity to whom a DSO could be due for nondischargeability).

Attorney Fees Owed by Debtor’s Own Counsel

Attorney fees awarded to a debtor’s own counsel are generally dischargeable as ordinary debts. See Berse v. Langman (In re Langman), 465 B.R. 395 (Bankr. D.N.J. 2012); Fein, PC & Assocs. v. Young (In re Young), 425 B.R. 811 (Bankr. E.D. Tex. 2010); In re O’Brien, 367 B.R. 240 (Bankr. D. Mass. 2007); Dean v. Brunsting (In re Dean), 231 B.R. 19 (Bankr. W.D.N.Y. 1999); Brennan, Fabriani & Novenstern v. Akamine (In re Akamine), 217 B.R. 104 (S.D.N.Y. 1998); Brian M. Urban Co., LPA v. Wenneman (In re Wenneman), 210 B.R. 115 (Bankr. N.D. Ohio 1997); Woodruff, O’Hair & Posner, Inc. v. Smith (In re Smith), 205 B.R. 612, 615 (Bankr. E.D. Cal. 1997). Lawyers owed these debts have tried to argue under other provisions of the Bankruptcy Code that the debt due to them is nondischargeable. These provisions require that adversary proceeding complaints be filed within 60 days of the section 341, first meeting of creditors pursuant to § 523(c) and Bankruptcy Rule 4007. These actions are difficult to win. See, e.g., Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018), and deBenedictis v. Brady-Zell, 500 B.R. 295 (1st Cir. BAP 2013), for interesting cases filed by attorneys against former clients seeking to collect their fees in the bankruptcy case as nondischargeable debt.

Sanction-Based Fees in Bankruptcy

The Bankruptcy Code has historically expressed a preference for the creditor who is owed support. Attorney fees awarded to the ex-spouse that are “in the nature of support” fall into this support category and, as addressed supra, are treated, for the most part, as if they, too, are for support. Fees owed to one’s own counsel are, generally speaking, “for services rendered” and not “for support,” although counsel have been known to argue to the contrary, and these fees have been determined to be dischargeable as a general debt of the bankruptcy case. Sanction-based fees are generally awarded under statutory provisions that are not support-related in nature. For example, if fees are awarded for abusive litigation, the underlying fee award does not generally have the underlying “support” components of DSO to be nondischargeable under § 523(a)(5). If they are awarded directly to a “spouse, former spouse, or child of the debtor” in a manner that complies with § 523(a)(15), they may remain nondischargeable from Chapters 7, 11, and 12 pursuant to that provision but may be subject to discharge in a completed Chapter 13 case.

If the attorney fees are awarded directly to the opposing counsel attorney, they may be treated as any other debt in the bankruptcy case. There may, however, be other arguments available to the attorney-creditor such as section 523(a)(6), which may or may not be successful. Note that this provision is not automatic, affirmatively requiring the filing of an adversary proceeding within definitive time constraints, and is not applicable within Chapter 13 cases (although there may be other remedies available within a Chapter 13 case that are beyond the scope of this article). Section 523(a)(6) precludes the discharge of debts incurred by willful and malicious conduct, which may include intentional torts. See, e.g., Fischer v. Scarborough (In re Scarborough), 171 F.3d 638 (8th Cir. 1999) (state court determination that debt was incurred by willful and malicious conduct by ex-wife was entitled to collateral estoppel effect in bankruptcy case and debt, including punitive damages, arising from malicious prosecution claim held by nondebtor/ex-husband was nondischargeable in ex-wife’s case under § 523(a)(6)); Sielschott v. Reimer (In re Reimer), 182 B.R. 86 (Bankr. E.D. Mo. 1995) (attorney fees for ex-wife’s pursuit of contempt was nondischargeable as debtor’s conduct in intentionally failing to pay court-ordered property settlement, temporary support, child support, child care expenses, and child medical expenses was willful and malicious). For an example of a case tackling these arguments, see Rackley v. Rackley (In re Rackley), 502 B.R. 615 (Bankr. N.D. Ga. 2013), where a bankrutpcy judge parses through various state fee provisions under state law and applies them to the Bankurptcy Code.

The word “willful” in [523](a)(6) modifies the word “injury,” indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Had Congress meant to exempt debts resulting from unintentionally inflicted injuries, it might have described instead “willful acts that cause injury.” Or, Congress might have selected an additional word or words, i.e., “reckless” or “negligent,” to modify “injury.”

Section 523(a)(6) requires the actor to intend the injury, not just the act that leads to the injury. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). “‘Malicious’ means ‘wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill-will.’ To establish malice, ‘a showing of specific intent to harm another is not necessary.’” Maxfield v. Jennings (In re Jennings), 670 F.3d 1329, 1334 (11th Cir. 2012).

Another bankruptcy case addressing attorney fees, analyzing a Supreme Court case under a different subsection of 523, determines as follows:

In Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), the Supreme Court held that § 523(a)(2)(A) excepted from discharge any liability arising from fraudulently obtained money, property, services, or credit, including punitive damages and attorney fees. See id. at 223, 118 S.Ct. 1212. The Court’s holding turned on its interpretation of “debt for” in § 523(a)(2). See id. at 219–21, 118 S.Ct. 1212. “Debt for” comes up in other subsections, including (a)(6), which excepts from discharge “any debt—for willful and malicious injury by the debtor to another entity or to the property of another entity.” Thus the Court’s holding is not limited to § (a)(2) debts. See id.; In re Dinan, 448 B.R. at 785 (“The Supreme Court did not limit its holding in Cohen to cases only under section 523(a)(2)(A). The Court also cited sections 523(a)(1)(B), (a)(4), (a)(6), and (a)(9) as clear examples of instances in which damages, including attorney’s fees, that exceed actual damages would be nondischargeable.”). Attorney fees incurred because of a debtor’s willful and malicious acts are therefore nondischargeable.

Smith v. Smith (In re Smith), 489 B.R. 875, 888 (Bankr. M.D. Ga. 2013). This case is not about the dischargeability (or nondischargeablity) of attorney fees arising from a divorce-related action; rather, the case was a pro se filing and involved malicious prosecution allegations and other procedural quagmires, and the defendant was requesting costs and fees. Language in it, however, may be helpful. Cohen v. de la Cruz is also not a divorce-related action; it was a landlord-tenant dispute for fraud and treble damages. It too, however, may have useful arguments.

Secured Claims for Fees in Bankruptcy

A basic premise of bankruptcy law is that secured creditors fare better than unsecured creditors. Liens generally survive the bankruptcy discharge. The debtor may, however, avoid some liens. Section 522(f)(1) provides that the debtor may avoid a judicial lien, which is defined under § 101(36) as a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” “Lien” is defined under § 101(37) as a “charge against or interest in property to secure payment of a debt or performance of an obligation.” Any lien sought by counsel or a former spouse should be properly recorded under appropriate state law. Bankruptcy is a notice-oriented statute, and if the lien is not “of record” as to bona fide purchasers, it will be vulnerable and likely to be treated as if it was not there at all. See, e.g., In re Parrish, 7 F.3d 76 (5th Cir. 1993) (lien on husband’s separate property avoidable); Baldiga v. Golemo (In re Golemo), 494 B.R. 588 (Bankr. D. Mass. 2013) (trustee could avoid ex-wife’s interest in real estate arising in unrecorded pre-petition divorce decree); In re Hartman, 335 B.R. 176 (Bankr. D. Kan. 2005) (debtor could not avoid ex-wife’s lien arising from divorce decree).

Section 522(f)(1)(A) expressly provides that a judicial lien may not be avoided if it secures a debt of a kind that is specified in section 523(a)(5). See, e.g., In re Cannon, 254 B.R. 773 (S.D. Fla. 2000) (bankruptcy court partially avoided lien awarded to debtor’s ex-spouse in their divorce in the amount that appeared to secure a property settlement awarded to her; the district court reversed, determining that the entire lien was unavoidable). Accordingly, liens that secure alimony, maintenance, and support debts may not be avoided by the debtor. § 522(f)(1)(A); see Taylor v. Taylor (In re Taylor), 233 B.R. 639 (S.D.N.Y. 1999). They may be avoided to the extent they secure post-petition alimony payments on property being sold in the bankruptcy case by the Chapter 7 trustee. (Stair v. Shumate (In re Shumate), 42 B.R. 462 (Bankr. E.D. Tenn. 1984).

This provision has been successfully used to preclude the avoidance of a judicial lien filed by an attorney for fees awarded following his successful paternity action on behalf of an adult daughter of the debtor because they were “in the nature of support.” See In re Allen, 217 B.R. 247 (Bankr. S.D. Ill. 1998).

Attorney fees that are not in the nature of support may be subject to avoidance, but if there is equity in the underlying property to which the lien attaches, the attorney probably has a much improved chance of being paid with a lien properly recorded under appropriate state law than without one. Secured is usually better than unsecured. If there’s no equity in the underlying property and the debt is for a non-DSO, then it may become more of a challenge to actually secure payment.

Entity:
Topic:
The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.

Shayna M. Steinfeld board certified by the American Board of Certification in Business and Consumer Bankruptcy law, practices with her husband, Bruce, a fellow of the American Academy of Matrimonial Lawyers, at Steinfeld & Steinfeld, PC in Atlanta. A more complete profile of her 30 years in practice can found at http://www.steinfeldlaw.com.