April 30, 2015 | Sherrard Roe Blog | Michael G. Abelow
The holy grail of litigation is winning the case and getting the other side to pay your attorneys' fees. When this happens, the loser may consider bankruptcy to avoid having to pay the judgment (with the judgment now including the winner's attorneys' fees).
Attorneys' Fees and Bankruptcy: A Real-World Example
For example, say there is a state court lawsuit under the Tennessee Consumer Protection Act (TCPA). The TCPA allows the state court to award the winner attorneys' fees. T.C.A. § 47-18-109. The state court plaintiff wins the TCPA claim and is awarded attorneys' fees. Defendant files for bankruptcy. Plaintiff then chases the defendant into bankruptcy and argues (successfully) that the debt is not dischargeable.
For example, in our TCPA scenario, the Plaintiff might argue that it falls into the exception to discharge for:
- "fraud" (523(a)(2)(A) of the Bankruptcy Code)
- a "willful or malicious injury" (523(a)(6) of the Bankruptcy Code)
Two Key Questions
Questions arise:
- Can the defendant/debtor discharge the state-court fees portion of the TCPA judgment?
- Can the plaintiff get his attorneys' fees for having to pursue a non-dischargeability action in bankruptcy court?
Can Attorneys' Fees Be Discharged in Bankruptcy?
The answer to (1) is no, the attorneys' fees portion of the judgment is not dischargeable. This is based on the U.S. Supreme Court's decision in the 1998 Cohen case, in which the Court considered the fraud exception to discharge and concluded that where the underlying state court judgment includes attorneys' fees (and treble damages), the entire judgment is not dischargeable.
Contractual Basis for Attorneys' Fees
The second question is much more interesting. At least in Nashville, the answer depends on whether the basis for attorneys' fees is contractual or statutory. Where the basis is contractual, the attorneys' fees for the non-dischargeability action can be awarded by the bankruptcy court.
The contractual answer comes from the Sixth Circuit's 1985 decision in Martin, in which the creditor proved the debtor used a false financial statement to borrow money under a promissory note. Since the note provided for attorneys' fees, the Sixth Circuit ruled that the contractual attorneys' fees included fees for the bankruptcy non-dischargeability issues.
Statutory Basis for Attorneys' Fees
But where an underlying state court statute allows for fees, the plaintiff is out of luck; the fees for the bankruptcy proceeding are not included. Ten years later, in Colbert, the bankruptcy court here declined to extend Martin to state statutes that allowed for attorneys' fees. So, in our hypothetical TCPA claim, the plaintiff will not be able to get her attorneys' fees for the bankruptcy case itself.
