Month: January 2018

Does a divorce attorney have standing to contest the dischargeability of attorney’s fees as a domestic support obligation in bankruptcy?

Yes, in the case of Collins v. Solomon, Case No: 12-14664 (Oct. 29, 2013) where the United States District Court for the Eastern District of Virginia denied the husband’s motion to dismiss an adversary proceeding filed in the U.S. Bankruptcy Court, Eastern District of Virginia, by wife’s former divorce lawyer.

In Collins, the wife had been granted a final decree of divorce in a state other than Virginia.  The final decree of divorce included a provision for the award of wife’s attorney’s fees of $39,500 payable to wife’s divorce lawyer in monthly installments of $5,000 until paid in full.  In making its award, the divorce court cited the Virginia Supreme Court case of Chawla v. Burgerbusters, 255 Va. 616, 499 S.E.2d 829 (1998) in support of the reasonableness of the substantial award of attorney’s fees to wife, due to the husband’s intentional concealment of his income and business records in the divorce case.

Following the divorce case, the husband filed for chapter 13 bankruptcy relief in the U.S. Bankruptcy Court for the Eastern District of Virginia.  Chapter 13 bankruptcy is favored by former spouses after a divorce because it allows the former spouse to discharge a non-domestic support obligation debt owed to a former spouse, former spouse, or child of the debtor that was incurred in the course of a separation or divorce, or in connection with a separation agreement, divorce decree or court order.  11 U.S.C. §1328(a).   In his bankruptcy case forms filed, the husband listed the wife’s divorce attorney as a general unsecured creditor on his Schedule F, rather than a priority creditor for a domestic support obligation on his Schedule E.  The wife and her attorney filed an adversary proceeding in the bankruptcy court seeking a determination that the attorney’s fees debt owed to wife’s attorney was both a priority debt under 11 U.S.C. § 507(a)(1)(A) and a nondischargeable debt under 11 U.S.C. §523(a)(5) as a “domestic support obligation”, as defined in 11 U.S.C. 101(14A).  In general, priority debts must be paid in full under a debtor’s confirmed chapter 13 plan.  Domestic support obligations cannot be discharged in bankruptcy under any chapter of the bankruptcy code.

Almost a year after the husband’s chapter 13 bankruptcy filing, the wife filed a chapter 7 bankruptcy case pro se in the United States Bankruptcy Court for the Eastern District of Virginia.  She also terminated her relationship with the divorce attorney who was owed fees by the ex-husband in his chapter 13 bankruptcy.  In her chapter 7 case, the wife sought, and later obtained, a discharge of the debt owed to her divorce lawyer.  The husband filed a motion to dismiss the adversary proceeding on the grounds that the debt owed to the wife’s former lawyer was now no longer “in the nature of support”, and thus could not be a domestic support obligation .  Further, the husband argued that wife’s divorce lawyer lacked standing to be a party Plaintiff in the adversary proceeding against the husband in his bankruptcy case because the wife was no longer asserting her claim for attorney’s fees against husband.  The husband also alleged the separation agreement between husband and wife represented a settlement of any claims between them, and included a provision whereby each party was responsible for his or her own counsel’s fees and costs.

The Bankruptcy court judge ignored the separation agreement between the parties, as it had not been incorporated into the final decree of divorce, was therefore not properly part of the record for consideration.  On appeal, the U.S. District Court held that, even if part of the record, the separation agreement would not have supported the husband’s argument.  The U.S. Bankruptcy Court denied the husband’s motion to dismiss the adversary proceeding and declared that the attorney’s fees owed to wife’s attorney were nondischargeable in the husband’s chapter 13 bankruptcy case under 11 U.S.C. §523(a)(5) as a domestic support obligation.  The husband appealed the bankruptcy court’s decision to the U.S. District Court, where the matter was decided on the briefs, without oral argument.

On appeal, the parties agreed that the only issue was whether the wife’s former divorce lawyer was a proper party to bring the nondischargeability complaint in the bankruptcy court.  The U.S. District Court for the Eastern District of Virginia first recognized the standard of review in bankruptcy appeals: fact findings would be set aside if clearly erroneous, citing Bankruptcy Rule 8013, and legal issues, or mixed issues of law and fact, were decided de novo, citing In re: Johnson, Canal Corp v. Finnman, 960 F.2d 396 (4th Cir., 1992) .  The court then noted that the bankruptcy court judge relied on the final decree of divorce in reaching its holding that the wife was the real party in interest, with payment to be made to her attorney.  Under Federal Bankruptcy Rule 4007(a), the debtor or any creditor may file a complaint to determine the dischargeability of any debt.  “Creditor” is defined in 11 U.S.C. §101(10) as an “…entity that has a claim against the debtor…” and a “claim” is defined in 11 U.S.C. §101(5) as a “…right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured…”

The U.S. District Court disregarded the husband’s reliance on In re Macys, 115 B.R. 883 (EDVA, 1990) decided in the Richmond Division, because that decision did not include the specific language of the final decree of divorce, thus rendering it impossible to understand the basis for the decision.  The court instead found the decision in In re Bulman, 123 B.R. 24 (1990) to be on point.  In Bulman, the bankruptcy court held both the spouse, to whom an award of attorney’s fees was made, and the attorney, to whom the fees were to be paid, had a sufficient interest in the payment of the attorney’s fees to make each of them a real party in interest.  As the wife alone had filed an adversary proceeding in Bulman, the attorney was required to submit a letter indicating his ratification of the filing.

The U.S. District Court also noted decisions from two other circuits, one from the Second Circuit Court of Appeals in In re Spong, 661 F.2d. 6 (1981) and one from the Ninth Circuit Bankruptcy Appellate Panel in Matter of Gwinn, 20 B.R. 233 (1982).  In Spong, the husband and wife entered into a separation agreement under which the husband agreed to pay wife’s attorney’s fees to her attorney.  The agreement was incorporated into a final decree of divorce.  The Second Circuit Court of Appeals held in Spong that the attorney was entitled to file a dischargeability complaint as a third party beneficiary of the agreement.

Similarly, in the Gwinn case, the divorce court judge ordered the husband to pay the wife’s attorney for her legal fees incurred in the divorce.   When the lawyer filed a nondischargeability complaint against the debtor husband, the bankruptcy court granted summary judgment to the debtor husband, ruling that the divorce lawyer lacked standing to claim nondischargeability under the literal wording of 11 U.S.C. §523(a)(5) and 11 U.S.C. §101(14A), as he was not a “…spouse, former spouse, or child of the debtor…” and the debt did not satisfy the not “assigned to a nongovernmental entity…” requirement of a domestic support obligation.   Citing the Second Circuit’s decision in Spong, the Ninth Circuit BAP reversed the bankruptcy court and ruled the debt was not dischargeable and had not been assigned to the attorney.

Consequently, the appellate court in Collins held that the attorney had standing to bring a nondischargeability complaint against the debtor husband, whether the attorney was a party to the obligation or a third-party beneficiary, because the divorce court judge intended that the husband pay the wife’s attorney’s fees in the final decree of divorce.  Further, the court noted that bankruptcy court judges have equitable powers “…invoked to the end that fraud will not prevail, that substance will not give way to form, that technical considerations will not prevent substantial justice from being done…”, quoting Pepper v. Litton, 308 U.S. 295 (1939). [The bankruptcy court’s equitable powers are now codified in 11 U.S.C. §105].  In this case, the court concluded, it would be unjust to deny the wife’s attorney the attorney’s fees based on both the plain language of the final decree and the record of husband’s conduct in the divorce proceedings.

You should consult with your bankruptcy divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss the dischargeability of attorney’s fees in your particular circumstances.

Is an overpayment of spousal support nondischargeable in a chapter 7 bankruptcy case?

Yes, in the case of In re: Eloisa Maria Taylor, Matthew E. Taylor v. Eloisa Maria Taylor, 737 F.3d 670 (10^th Cir., 2013), where the Tenth Circuit Court of Appeals affirmed the U.S. Bankruptcy Court’s holding, on appeal from the Bankruptcy Appellate Panel for the 10^th Circuit, that the overpayment was nondischargeable under 11 U.S.C. §523(a)(15) as a debt incurred in connection with a separation agreement.

In the Taylor case, the husband and wife were married for seventeen years before obtaining a divorce in the Circuit Court of Fairfax County, Virginia.  The final decree of divorce incorporated a Marital Settlement Agreement between the parties, also referred to variously in Virginia divorce law as a separation agreement, property settlement agreement, marital agreement, or agreement and stipulation in accordance with §20-109 and §20-109.1 of the Code of Virginia, as permitted by the Virginia Premarital Agreement Act, Virginia Code Section 20-155.  In accordance with the terms of the parties’ separation agreement, the Virginia Circuit Court judge ordered the husband to pay spousal support of $2,500 a month to wife until the death of either party, or the remarriage of wife, or ten years of payments, whichever first occurs.  After less than four years the husband moved the court to terminate the alimony payments on the grounds wife was living with another man in a relationship analogous to marriage, a basis for the termination of court-ordered spousal support under Virginia Code Section 20-109(A).  The divorce court judge agreed with the husband and retroactively terminated the spousal support obligation to the wife, resulting in a money judgment against the wife of more than $50,000 for the husband’s overpayment of support for the period after her cohabitation.  Less than two months later, the wife filed a chapter 7 bankruptcy case.

The husband then filed an adversary proceeding, under Federal Rules of Bankruptcy Procedure 7001(6), ancillary to the wife’s bankruptcy case for a determination that the overpayment of support was a nondischargeable debt under 11 U.S.C. § 523(a)(2)(A), (5) and (15).  The bankruptcy court granted the husband’s motion for summary judgment (Federal Rules of Bankruptcy Procedure 7056 and Federal Rules of Civil Procedure 56) and ruled that the overpayment debt was nondischargeable under 11 U.S.C. 523(a)(15) as a debt “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement…”  The bankruptcy court did not, however, address the husband’s request for attorney’s fees in connection his nondischargeability complaint.  Husband and wife both appealed the decision.

On appeal, the Bankruptcy Appellate Panel (“BAP”) affirmed the bankruptcy court judge’s rulings that the debt was not a nondischargeable “domestic support obligation” (as defined in 11 U.S.C §101(14A) ) under 11 U.S.C. §523(a)(5) and that it was a nondischargeable debt under 11 U.S.C. § 523(a)(15).  The BAP also ruled that the bankruptcy court did not have authority to award attorney’s fees to the husband under the parties’ Marital Separation Agreement. Both parties appealed again.

On appeal, the Tenth Circuit Court of Appeals first recognized the applicable standards of review in bankruptcy court appeals: fact findings by the bankruptcy court would be upheld unless clearly erroneous and questions of law would be decided de novo, or, as if for the first time.  The BAP’s decision was merely persuasive as a subordinate appellate court.  In addition, in family law cases, the decision whether a debt is “…in the nature of support…” constituting a Domestic Support Obligation under 11 U.S.C. §101(14A) is a fact finding, subject to the clear error standard.

The Federal Court of Appeals then recognized the two types of family law debts that are exceptions to discharge: “domestic support obligations” under 523(a)(5) and non-DSO debts arising out of divorce proceedings or separation agreements under 523(a)(15).  The 10^th Circuit Court analyzed whether the debt was in the nature of support by a dual inquiry, looking at both the intent of the parties and the nature of the obligations. While the description of the nature of the debt by the parties in the property settlement agreement is not controlling, state law may inform the court of the nature of the debt.  The appellate court held the support overpayment was not a domestic support obligation because it was not owed to the creditor spouse husband in this case, thus failing to meet the second requirement, “..in the nature of support…of such spouse…”, in 11 U.S.C. §101(14A)(B).  In other words, in order to be a domestic support obligation under the plain meaning of the statute, the creditor must be the spouse who was owed support.  In this case, the debt was an overpayment of support of the debtor, not the creditor.

Nevertheless, the appellate court did hold that the overpayment was nondischargeable as the second type of family law debt,  a non-DSO arising out of a divorce case or separation agreement.  In doing so, the court disregarded the wife’s argument that the literal application of 523(a)(15) in this case was contrary to intentions of the legislators in drafting that bankruptcy provision to protect the dependent spouse.  The absurdity doctrine advanced by the wife was inapplicable in this case where there were no extreme circumstances or shocking result from application of the plain meaning.  In addition, the legislative intent behind 523(a)(15) was to prevent a spouse from discharging a larger debt assumed by the filing spouse, with a “hold-harmless” provision, in exchange for a reduction in a domestic support obligation owed to the nonfiling spouse.  The court applied the plain meaning of both 11 U.S.C. § 101(14A) and 11 U.S.C. § 523(a)(15) in ruling the support overpayment debt was nondischargeable.  The denial of husband’s attorney’s fees was affirmed, as not supported by the marital separation agreement between the parties.

As an interesting note, the wife might have discharged this debt had she filed chapter 13 bankruptcy instead of chapter 7 bankruptcy, under the broader discharge provided in 11 U.S.C. §1328(a), which allows for the discharge of non-DSO debts arising from divorce proceedings or a separation agreement.

You should consult with your Virginia bankruptcy and divorce lawyer, or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether a particular family law debt may be excepted from discharge.