As an attorney, you have obtained a judgment for fees in a hard-fought domestic relations dispute. You are in the process of deciding how best to collect your fees since the party who owes them to you has little interest in paying. You return to your office one day from court and find in your mail the dreaded bankruptcy notice of automatic stay. Is your judgment no longer worth the paper upon which it is printed? It depends on whom you represented and what your fees were for.
In general, a party seeking to establish that a debt is non-dischargeable in bankruptcy must do so by filing an adversary complaint pursuant to Rule 7001, et seq. of the Bankruptcy Code. Someone attempting to establish non-dischargeability of a debt bears the burden of proof by a preponderance of the evidence. Selfreliance Federal Credit Union v. Harasymiw, 895 F.2d 1170, 1172 (7th Cir., 1990); Grogan v. Grogan, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed. 755 (1991); In re McFarland, 84 F.3d 943,946 (7th Cir., 1996). Usually, exceptions to discharge are to be construed strictly against a creditor and liberally in favor of a debtor to further the policy of providing the bankrupt debtor with a fresh start. Goldberg Secs., Inc. v. Scarlota, 979 F.2d 521, 524 (7th Cir., 1992). That policy is tempered when the debt arises from a divorce or separation agreement.
The exception related to support obligations arising from domestic relations issues is set forth in Section 523(a)(5) of the Bankruptcy Code. (11 U.S.C., Sec. 523(a)(5).) This section is construed more liberally than the other Section 523 exceptions. In re Crosswhite, 148 F.2d 879, 881-882 (7th Cir., 1998).
Section 523 of the Bankruptcy Code sets forth specific exceptions to the dischargeability of debts. In relevant part, Section 523(a)(5) states:
(a) a discharge under Section 727...of this title does not discharge an individual debtor from any debt...
(5) to a spouse, former spouse or a 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 governmental unit, or property settlement agreement.… 11 U.S.C., Sec. 523 (a)(5).
Section 523(a)(5) sets out three requirements that must be met in order for a 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 court of record.
In re Reines, 142 F.3d 970, 972-973 (7th Cir., 1998). Usually, in addressing the issue of whether attorney’s fees incurred in a domestic relations setting are dischargeable, only the first two criteria are seriously in dispute.
A. The child’s representative always wins.
In the case of In re Brodsky, 239 B.R. 365 (Bankr. N.D.Ill., 1999) the Honorable John H. Squires (Bankruptcy Judge for DuPage County) decided that fees owed to an attorney for the child or guardian ad litem, and by inference the child’s representative, as the result of a judgment for dissolution of marriage, are non-dischargeable as being in the nature of a "support" obligation.
In that case, Michael Shevick was appointed as guardian ad litem for the two minor children of the Brodskys. The judgment entered in that case awarded Mr. Shevick $5,200.00 in attorney’s fees, and ordered Mr. Brodsky to pay them. Brodsky subsequently filed a Chapter 7 bankruptcy and sought to discharge the debt. Shevick filed an adversary proceeding against Brodsky seeking a determination that the debt was non-dischargeable as being in the nature of support. At the trial, it was uncontested that Shevick was appointed as the GAL for the children. Beyond that, the testimony was conflicting as to what services, if any, Shevick actually rendered. Shevick did not produce time records at the trial, and stood on the judgment itself as being a non-dischargeable obligation.
In applying the factors usually used by courts in determining whether a debt is in the nature of support or maintenance, the court found that it was unable to ascertain from the text of the judgment whether the debt to Shevick was in the nature of support or properly characterized as a division of property. (232 B.R. at 371-372.) The court noted the fact that there has been a great deal of litigation regarding an award of fees to an attorney of minor children or to a guardian ad litem appointed in a state court divorce or dissolution proceeding. Judge Squires stated that the majority of courts confronted with this issue have decided that fees ordered by a state court to be paid by the debtor directly to the attorney or guardian ad litem for minor children are non-dischargeable support obligations, while a minority has ruled that the debt may be dischargeable. The Court saw no functional difference between a guardian ad litem and an attorney for a minor child.
Judge Squires adopted the majority view, stating:
Children are not property of their parents and usually have no property of their own to be divided in a marital dissolution proceeding. The services provided to them by an attorney or guardian ad litem are typically rendered for the protection of their health and welfare as was done here. This is more in the nature of support than a property settlement from a practical and common sense approach.
The fee award to Shevick being reduced to judgment, the court found it to be entitled to full faith and credit pursuant to 28 U.S.C., Section 1738, and therefore did not consider arguments or testimony by either the debtor or his former spouse that Shevick did not perform services worth the $5,200.00 awarded.
The bottom line is, if you are a child’s representative appointed by court order, your court-ordered fees are non-dischargeable. (239 B.R. at 374.)
B. Your own client files bankruptcy: The attorney never wins.
In the sad event that your client files a Chapter 7 bankruptcy naming you as a creditor, your fees will be promptly discharged by the court despite the efforts you have exerted on behalf of your former client, and regardless of the result produced.
In the case of In re Rios, 901 F.2d 71 (7th Cir., 1990), the Seventh Circuit held that attorney’s fees owed by a debtor/client do not fall under the discharge exemption of Section 523(a)(5). The Seventh Circuit in Rios agreed with the reasoning in In re Lindberg, 92 B.R.481 (Bankr. D. CO., 1998), which held that a debtor’s liability for his own attorney’s fees incurred in a child support dispute is not a debt owed "to a spouse" for purposes of Section 523(a)(5). (92 B.R. at 483).
The court in Rios pointed out that cases which allow an exemption to the discharge for attorney’s fees to obtain child support are based on the theory that the expenses of a spouse or child for support collection are part of the underlying obligation. That theory cannot stretch to cover fees for an attorney hired by the debtor, unless there is some legal obligation to hire an attorney on behalf of the spouse or child. Rios, 901 F.2d at 72. Rios decided that the debtor’s agreement with the creditor attorney did not generate a debt to the child, so that the debtor’s obligation to her attorney in that case was not in the nature of child support. The court’s opinion in Rios was cited with approval in the Seventh Circuit case of In re Platter, 140 F.3d 676 (7th Cir., 1998).
If your client files a Chapter 7 bankruptcy which includes fees that are owed to you at the time of filing, you are out of luck.
C. The other side files bankruptcy: You might win.
If you have proceeded on behalf of your client against the other side to obtain support payments, and were awarded attorney’s fees by the court as the result of your actions, the debt owed by the other side to you in generally non-dischargeable. The court in Rios stated:
[A]wards of attorney’s fees for services in obtaining support awards have been held non-dischargeable even though the
attorney is niether a spouse, a former spouse, nor a child of the debtor. (Citation omitted.)
The cases which deny discharge for attorney’s fees incurred to obtain child support assimilate the debt owed the attorney to a debt owed "to a spouse, former spouse, or child of the debtor." (Citations omitted.) (Rios at 72.)
It is important to remember that attorney’s fees must be incurred in the State court prior to the filing of the Chapter 7 bankruptcy, and are only non-dischargeable to the extent that they were incurred to obtain support.
D. Record a lien.
If the debtor owns real property, and if you recorded a memorandum of judgment as a lien against the property prior to the filing of bankruptcy, the in rem lien survives the bankruptcy. The debtor may file a motion to avoid the lien to the extent that the lien impairs an exemption to which the debtor would have been otherwise entitled. (11 U.S.C., Section 522(f)(1).) The homestead exemption in Illinois is currently $7,500.00. (735 ILCS 5/12-901.) The rules for filing a proceeding by the debtor to avoid a lien is set forth in Rule 4003 of the bankruptcy rules, and by reference in Rule 9014.
If you record your lien against a debtor’s property prior to filing of the Chapter 7 petition, and if the other side does not defeat your lien by way of lien avoidance, or simply forgets to file the requisite motion timely, you may still get paid regardless of who you represented. Assuming that there was insufficient equity in the property for the trustee to sell it as an asset, and the debtor decides to sell the property subsequent to discharge, you would have to be paid in order for the debtor to convey good title.
This is not a perfect solution but is more palatable than no solution at all.
Before proceeding against a debtor who has filed a Chapter 7 bankruptcy, the issue of dischargeability must be determined by the court, which takes place subsequent to the filing of a complaint to determine dischargeability of debt. (See Rule 7001 et seq. of the Bankruptcy Rules.) A finding of non-dischargeability only allows the prevailing party to seek State court remedies (citations, garnishments, etc.) against the debtor without the encumbrance of the automatic stay or discharge injunction. Nonetheless, a debtor who is discharged from all of his or her obligations under Chapter 7 may ultimately make a more inviting target for collection than one who is strapped by monthly payments. In all events, whether attorney’s fees incurred against a Chapter 7 debtor are collectable depends on who received the services and the bases for the fees.
Thomas A. Else received his J.D. from DePaul University Law School in November of 1982. His practice is concentrated in State and Federal Civil Litigation.