Family law attorneys risk having their unpaid legal fees discharged in bankruptcy like all other creditors. Clients have the absolute legal right to discharge in bankruptcy all dischargeable legal fees. Not being paid after providing legal services is a frustrating reality, especially after an attorney provides premium service and achieves magnificent results. This article addresses a client’s ability to discharge legal fees by filing a Chapter 7 bankruptcy petition and then the article provides strategies to avoid losing hard-earned legal fees.
Many family law attorneys don’t consider the Bankruptcy Code’s impact on collecting legal fees until it’s too late. Attorneys who take proactive steps prior to a client’s bankruptcy filing won’t be negatively affected by the filing. However, attorneys who are forced to take reactive steps find themselves at a distinct disadvantage.
The primary legal attack used by family law attorneys to protect uncollected legal fees is an adversary complaint in the Bankruptcy Court. The complaint seeks a judgment that the attorney fee debt is non-dischargeable, despite the US Bankruptcy Code’s provisions that grant debtors a fresh-start by jettisoning pre-petition debt. This attack has proven fruitless in the past.
Bankruptcy and Standards for Attacking Discharge
Chapter 7 of the US Bankruptcy Code provides the basic procedure designed to give divorcees or "debtors" a fresh start in life by jettisoning the accumulated burden of oppressive and often unmanageable debt loads. See 11 USC Section 701 et seq. Upon filing a Chapter 7 petition, debtors generally will be discharged from credit card debts, car loans, mortgage loans, medical and other debts. Thereafter, debtors have no further obligation to pay these debts and creditors are forever enjoined from enforcing claims.
Judge Ginsberg of the US Bankruptcy Court for the Northern District of Illinois stated in a scholarly treatise: "A discharge voids any judgment, whenever obtained, that determines the personal liability of the debtor on any discharged debt; enjoins any judicial or non-judicial action to collect, recover or offset any discharged debt as a personal liability of the debtor; and enjoins the collection of certain claims against the debtor’s community property". Ginsberg & Martin on Bankruptcy, Fourth Edition, Section 11.01(B).
The scope of a debtor’s discharge is not boundless however. The Bankruptcy Code does provide statutory authority for denying the discharge of certain debts. For example, Code Section 523 identifies exceptions to the fresh start, discharge rule and deems these exceptions as "non-dischargeable" debt, which a debtor must pay. See 11 USC Section 523. However, an attack on dischargeability of certain debts must be made by filing an adversary proceeding in the US Bankruptcy Court within the narrow time constraints allotted for objection. See Bankr. R. 4007(c) (60 days following the first date set for the meeting of creditors); see also Beasley v. Adams, 200 B.R. 630, 632 (USDC, ND. IL 1996)(Grady, J). Late or "stale" attacks will be procedurally dismissed without a determination on the merits.
Making attacks on dischargeability even harder, the public policies underlying the Bankruptcy Code encourage a "fresh start" for debtors and require that exceptions to discharge be strictly construed against creditors and in favor of a fresh start for debtors. AT&T Universal Card Services v. Alvi, 191 B.R. 724, 728 (Bankr. N.D. IL 1996)(Ginsberg, J.); FCC National Bank v. Phillips, 1994 WL 168279 (Bankr. N.D. IL 1994)(Squires, J.). The party seeking to establish an exception to the discharge of debt bears the burden of proof—that burden is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991); In re Robert Sheridan, 57 F.3d 627, 633 (7th Cir. 1995). The "discharge" feature is essential to the notion of a fresh start. AT&T Universal Card Services v. Alvi, 191 B.R. 724, 728 (Bankr. N.D. IL 1996)(Ginsberg, J.). To further the policy of providing a debtor a fresh start in bankruptcy, "exceptions to discharge are to be construed strictly against a creditor and liberally in favor of a debtor." Goldberg Secs., Inc. v. Scarlata, 979 F.2d 521, 524 (7th Cir. 1992). That policy of protecting and favoring debtors is tempered, however, when the debt arises from a divorce or separation agreement. In re Crosswhite, 148 F.3d 879, 881 (7th Cir. 1998).
The Discharge Challenge
Family law attorneys frequently encounter clients who do not have the financial wherewithal to pay the legal fees that exceed the initial retainer. Family law attorneys risk losing those uncollected fees when clients file Chapter 7 bankruptcy.
Family law attorneys have attempted to circumvent the Chapter 7 bankruptcy discharge by filing an adversary complaint against their client. These attorneys have sought a determination that the uncollected legal fees are "non-dischargeable".
A family law attorney who is objecting to the client’s discharge of uncollected legal fees typically utilizes Section 523’s divorce related exceptions as a sword in an attempt to render the client’s legal fees non-dischargeable. Section 523 provides the general scheme for establishing exceptions from discharge. Section 523(a)(5) establishes as non-dischargeable the client’s obligations of alimony, maintenance and support.
Section 523(a)(5) is the sharpest sword because of its broad statutory language specifically targeting divorced situations—declaring non-dischargeable marital obligations that are incurred for alimony, maintenance or support. Section 523(a)(5) provides in relevant part that the Bankruptcy Code does not discharge a debtor from any debts
"to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a government unit, or property settlement agreement". 11. USC. Section 523(a)(5).
Therefore, Section 523(a)(5) sets out three requirements that must be met in order for a client’s debt to be non-dischargeable: (1) the underlying debt must be in the nature of alimony, maintenance, or support; (2) the debt must be owed to a former spouse or child; and (3) the debt must be incurred in connection with a separation agreement, divorce, or property settlement agreement or other order of a court of record. In re Reines, 142 F.3d 970, 972 (7th Cir. 1998)(citing Kinnally v. Fonnemann , 128 B.R. 214, 217 (Bankr. N.D.IL 1991); Wawak v. Smolenski, 210 B.R. 780, 782 (Bankr. N.D.IL 1997); Colon v. Gallegos, 1998 WL 787194 (Bankr. N.D. IL 1998)(Squires, J.).
The determination of whether a debt is "alimony, maintenance, or support" is a matter of federal bankruptcy law rather than state law. Jodoin v. Samayoa, 209 B.R. 132, 137-138 (BAP 9th Cir. 1997); In re Moeder, 220 B.R. 52, 54 (BAP 8th Cir. 1998); Colon v. Gallegos, 1998 WL 787194 (Bankr. N.D. IL 1998)(Squires, J.); Haas v. Haas, 129 B.R. 531, 536 (Bankr.N.D.IL 1989). In making this determination, the Court must look to the substance of the obligation and not to labels imposed by state law. But state law is not irrelevant and may provide relevant guidance. The bankruptcy court has the power and discretion to conduct an independent review of the divorce decree and factual inquiry into the true nature of any support. Jodoin v. Samayoa, 209 B.R. 132, 138 (BAP 9th Cir. 1997).
The Seventh Circuit addressed the "alimony, maintenance, or support" issue in In re Linda M. Rios, 901 F.2d 711 (7th Cir. 1990). In Rios, a family law attorney was engaged to file a palimony suit and to seek child support. The retainer became exhausted and an unpaid attorney’s fee debt accrued. Instead of paying, the client sought to discharge the debt by filing a Chapter 7 bankruptcy. In response, the attorney brought an adversary complaint seeking a determination that the attorney’s fees were non-dischargeable because the client engaged the attorney to help the client fulfill the client’s duty to support the child, and that the legal fees were therefore a part of a support obligation that cannot be discharged.
The Rios Court rejected the "support" argument after noting that the family law attorney failed to identify any court order awarding the attorney fees at issue. The Seventh Circuit found that the discharge exception to Bankruptcy Code Section 523(a)(5) requires a court order mandating the payment of attorneys fees as part of the alimony or child support judgment. The Rios Court reasoned that in the absence of a specific court order, expenses incurred by a client to obtain support from an absent parent are not legally distinguishable from any other expenses that inure to the benefit of a child.
A New York Court addressed the "alimony, maintenance, or support" issue in Brennan, Fabriani & Novenstern v. Akamine, 217 B.R. 104 (Bankr. S.D.N.Y. 1998). In Akamine, the family law attorney represented a Chapter 7 debtor in matrimonial proceedings that included child support and custody litigation. The final settlement agreement entered by the court specifically stated that "each party shall pay his or her own attorney’s fees for services rendered in connection with the negotiation and execution of this Agreement." Thereafter, the client filed bankruptcy and sought to discharge the unpaid attorney’s fees.
Notwithstanding the final settlement agreement’s attorney fee provision entered by the matrimonial court, the Akamine Court ruled that the attorney failed to satisfy the third prong of the dischargeability test…i.e. that the debt was incurred "in connection with a separation agreement, divorce decree or other order of a court of record." The Court also noted that no matrimonial related agreement imposed upon the client any additional debt for legal fees that had not already been incurred directly between the client and the attorney. Plus, the Akamine Court found that the family law court did not award any attorney’s fees or increase the debtor’s burden to pay attorney’s fees. Finally, the Court worried that a family law attorney could unilaterally render the attorney’s own fees nondischargeable simply by adding a sentence to a client’s separation agreement stating that the divorcing parties shall bear their own legal costs. This, the Court opined would allow family law attorneys to ensure the collectability of the attorney’s contractual debts, while other professionals would remain powerless to alter the dischargeable nature of their services. Thus, the Court concluded that there is no justification for favoring family law attorneys over other professionals whose services may have even more clearly benefited the client and the client’s children. Consequently, the Court held that the attorney’s fees were dischargeable.
The most recent bankruptcy court to analyze the "alimony, maintenance, or support" issue was Dean v. Brunsting, 231 B.R. 19 (Bankr. W.D.N.Y. 1999). In Dean, a family law attorney argued that the uncollected legal fees were in the nature of support and should not be discharged because they were for services which included both (a) litigating child support, custody and visitation issues, and (b) negotiating, preparing and revising a separation agreement. The family law attorney also argued that a dangerous precedent would be established if the fees were dischargeable. The attorney argued that financially troubled individuals would have difficulty finding attorneys to represent them in matrimonial and related matters because prospective attorneys would refuse to accept cases in which unpaid legal fees may be discharged. The Dean Court rejected these arguments and held that attorney fees due from a debtor client to the attorney for pre-petition matrimonial and related legal services are dischargeable because the fees are simply due because of the client’s contractual relationship with the client’s attorney.
Other courts have also concluded that a client can discharge unpaid legal fees by filing a Chapter 7 bankruptcy. See In re Lindberg, 92 B.R. 481 (Bankr. D.Colo 1988); In re Klein, 197 B.R. 760 (Bankr. E.D.N.Y. 1996).
Family law attorneys should be paid for the services they render. Attorneys who wish to provide their services pro bono are not the focus of this article. To enhance a family law attorney’s chances of collecting unpaid legal fees, three steps should be considered. First, maximize the retainer so that the attorney can minimize losses in the event a client files Chapter 7 bankruptcy after the services have been performed. Second, insert a fee shifting provision into court entered orders that shift the responsibility of paying the uncollected legal fee from the family law attorney’s client to the client’s ex-spouse. Third, encourage a client who will inevitably file Chapter 7 to file the Chapter 7 petition BEFORE the family law attorney provides any legal services. The discharge occurs immediately upon filing and won’t delay the start of any family law matter by more than a few days. Thereby, all legal fees incurred after the filing are non-dischargeable post-petition debt that must be paid to the family law attorney.
Robert V. Schaller is a Sole Practitioner in Oakbrook Terrace. He is also a C.P.A. His practice is concentrated in Business and Bankruptcy Law. He received his Undergraduate Degree in 1982 from the University of Illinois-Urbana and his Law Degree in 1985 from DePaul University. He may be reached at email@example.com.