Opinion
Proceedings Case No.2-03-06143-PHX-CGC, Adv. No. 2-03-851.
July 5, 2007
UNDER ADVISEMENT DECISION RE: MOTION FOR PARTIAL SUMMARY JUDGMENT
At issue is the dischargeability of an attorneys' fee award granted by the Maricopa County Superior Court to Plaintiff Barbara Lees ("Barbara") and against Debtor Nicholas Lees ("Nicholas"). Barbara filed for divorce from Nicholas in October, 2000. On April 14, 2003, Nicholas filed Chapter 11; The case was converted to Chapter 7 on June 19, 2003. Upon request by Barbara, the Court modified the automatic stay so the parties could proceed to litigate various matters before the state court in the divorce proceedings.
On November 21, 2006, the state court issued an order awarding Barbara $300,000 in attorneys' fees and $150,000 for costs incurred in the dissolution proceeding. In relevant part, the Order provided as follows:
Under ARS 25-324, the Court is authorized to issue orders requiring one party to pay the reasonable costs and fees incurred in a divorce proceeding. The Court can consider the reasonableness of a position of the parties, their respective financial positions, whether the parties acted in good faith throughout the pendency of the action, and their ability to pay. The record indicates that the Respondent is an individual of substantial means. Under the case law, the Court has wide discretion in awarding attorney fees.
This judicial officer served over 6 years on a family court rotation, one-half as a commissioner and one-half as a judge. The court has considered thousands of cases during that time frame. In many cases, the parties represented themselves: in others, counsel represented the parties. This Court earlier determined that the Respondent had engaged in dilatory and obstructionist conduct. Other judicial officers assigned to this case made similar findings and expressed their findings in even stronger language. This Court did not encounter another case in which there was such flagrant abuse of the court system by one party in relation to another.
Based on the totality of the circumstances and in review of the statement of summary of charges presented to the court, the Court orders that judgment for attorney fees be entered in favor of the Petition, . . . and against Respondent . . . in the amount of $300,000 and costs in the amount of $15,000.
Nicholas argues that the fee award, even though entered postpetition, is a prepetition debt subject to the Bankruptcy Code's dischargeability provisions. And, in an odd twist, he claims the fee award should be discharged because it was not in the nature of support or spousal maintenance but that it resulted from his "flagrant abuse of the Court system."
There are really two issues before the Court today: 1. Is the fee award, or any part of it, a prepetition debt subject to discharge; and 2. If the award, or a part thereof, is a prepetition debt, is it subject to an exception to discharge under section 523.
The general rule in the Ninth Circuit is that "a claim arises, for purposes of discharge in bankruptcy, at the time of the events giving rise to the claim, not at the time the plaintiff is first able to file suit on the claim." O'Loghlin v. County of Orange, 229 F.3d 871, 874 (9th Cir. 2000); In re Marshall, 273 B.R. 822 (Bankr. C.D. Cal. 2002). This language suggests that we would need to parse the attorneys' fee award here and determine what portion of the fees arose from Nicholas' prepetition conduct and which arose from his postpetition conduct. Nicholas disagrees, relying on several cases from the Ninth Circuit in which the courts held that attorneys' fees awarded postpetition constituted prepetition debt if the source of the award was a prepetition contract or tort claim. These cases, for the most part, are not only factually distinguishable from the facts here, but in some cases have been expressly limited, distinguished or overruled.
For example, in In re Hoberg, 300 B.R. 752 (Bankr. C.D. Cal. 2003), the debtor and his ex-wife resolved their divorce case by stipulated judgment prepetition. In that stipulated judgment, the parties agreed that in the event either party later brought an action or proceeding to enforce any provision of the judgment, the prevailing party would be entitled to its reasonable attorneys' fees and costs. Ultimately, fees were awarded against the debtor both pre and postpetition. Relying on two other Ninth Circuit cases, the court summarily concluded that the fees awarded postpetition "are rooted in and are relevant to the prepetition Stipulated Judgment. Accordingly, they are treated as prepetition debts, subject to discharge, unless an exception applies." 300 B.R. at 764 (citing In re Vickie Lynn Marshall, 273 B.R. 822 (Bankr. C.D. Cal. 2002); In re Kadjevich, 220 F.3d 1016 (9th Cir. 2000)).
Hoberg is not persuasive. First, unlike this case, Hoberg involved attorneys' fees awarded under a prepetition contract. Second, there did not appear to be any allegations of postpetition unreasonable or abusive behavior or Hoberg. The award was purely given under the prepetition contract to the prevailing party. Third, and more importantly, the cases upon which the Hoberg court summarily relied, Marshall and Kadjevich, have since been overruled and distinguished, respectively, by later Ninth Circuit opinions. The Ninth Circuit expressly overruled In re Vickie Lynn Marshall, stating "[w]e reverse the district court because the conduct giving rise to the attorney fee award occurred post-discharge and therefore does not violate . . . [the] discharge injunction." In re Vickie Lynn Marshall 2004 WL 3016336 (9th Cir. 2004). Further, the analysis in Kadjevich, and other cases relied on by Nicholas such as In re Abercrombi, 139 F.3d 755 (9th Cir. 1988) and In re BCE West, LP, 319 F.3d 1166 (9th Cir. 2003), have since been limited to questions of administrative priority and made expressly inapplicable to cases involving questions of dischargeability. See In re Ybarra, 424 F.3d 1018 (9th Cir. 2005).
In Ybarra, debtor filed an employment discrimination case against her former employer. Subsequently, and without providing notice to her employer, debtor filed Chapter 11. When the employer learned of the bankruptcy, it successfully sought conversion to Chapter 7. The Chapter 7 trustee then entered into an agreement with the employer to settle the underlying discrimination case. The employer paid the estate $17,500 and the parties stipulated to dismiss the state court discrimination suit.
Apparently unhappy with the proposed settlement, debtor amended her schedule of exempt property to add the discrimination claim. The bankruptcy court ruled that the cause of action was exempt and gave debtor the option of taking the $17,500 in full satisfaction and release of her claims against her former employer or taking ownership of "all right, title and interest" in the lawsuit. She chose the latter and later succeeded in having the state court set aside the dismissal. Ultimately, however, she lost the case and her former employer was awarded over $450,000 in attorneys fees and costs. Meanwhile, however, debtor had received her discharge, so the employer sought leave of the bankruptcy court to enforce the fee award in light of the discharge. The bankruptcy court held that the portion of the award incurred by debtor after she filed her bankruptcy petition, approximately $159,000, was not discharged. On appeal, a divided BAP reversed, relying on Abercrombie and Kadjevich, both of which held that claims for postpetition fee awards could not be granted administrative expense priority in the distribution of bankruptcy assets.
The Ninth Circuit subsequently reversed the BAP on the grounds that the administrative priority cases should not apply to discharge cases. Starting with O'Loghlin, the court reiterated that a claim arises for discharge purposes at the time of the events giving rise to the claim. The court highlighted the decision in In re Jensen, 995 F.2d 925 (9th Cir. 1993), in which the court held that environmental cleanup expenses incurred postpetition, but which arose from prepetition conduct, were discharged in bankruptcy. Additionally, it pointed to the holding in O'Loghlin, where the court held that violations of the Americans with Disabilities Act that occurred preconfirmation where discharged in the county's bankruptcy, whereas violations that took place postconfirmation were not. The court's reasoned in these cases that a debtor could not insulate itself from postpetition or postconfirmation violations, even if they were part of the same course of conduct as prepetition or preconfirmation violations.
Because O'Loghlin involved a municipality bankruptcy, the critical date for dischargeability analysis was confirmation and not the petition date.
This rationale was further highlighted in a discussion of Siegel v. Federal Home Loan Mortgage Corp., 143 F.3d 525 (9th Cir. 1998). In that case, the mortgagee foreclosed on a property and filed suit in district court seeking a deficiency judgment against the mortgagor. Before trial, the mortgagor filed for bankruptcy protection. The bankruptcy court granted stay relief to allow the mortgagee to foreclose on another piece of property. Meanwhile, the debtor mortgagor brought a state court suit against the mortgagee, but ultimately the mortgagee won on summary judgment and was awarded its attorneys fees under its deed of trust. The debtor mortgagee was then granted his discharge. Debtor argued that the attorneys' fees were discharged in his bankruptcy proceedings. The court disagreed, stating that debtor's "decision to pursue a whole new course of litigation made him subject to the strictures of the attorney's fee provision. In other words, while bankruptcy did protect him from the results of his past acts, including attorney's fees associated with those acts, it did not give him carte blanche to go out and commence new litigation about the contract without consequences." Id. at 534. Based on the holding of these cases, the court in Ybarra concluded that "where postpetition, the debtor voluntarily `pursue[d] a whole new course of litigation,' commenced litigation, or `return[ed] to the fray' voluntarily," postpetition attorneys fee awards are not discharged.
While this Court acknowledges that Nicholas has not "returned" to a fray he had previously left or commenced new litigation, he did voluntarily choose a course of conduct postpetition that resulted in the attorneys' fee award against him. And, the Ninth Circuit's rationale as announced in the cases just discussed, make it clear that a debtor cannot insulate itself from postpetition actions simply because they may be related to or part of the same course of prepetition conduct. See 424 F.3d at 1023. To allow Nicholas to escape responsibility for attorneys' fees incurred by what he admits was his own unreasonable litigation tactics and/or flagrant abuse of the court system would be to encourage such further behavior with the free pass of a discharge even where the acts giving rise to the award occurred post-petition.
Therefore, the Court holds that any fees awarded as a result of Nicholas's postpetition conduct in the underlying litigation are nondischargeable. Any portion awarded as a result of his prepetition conduct are dischargeable, absent an exception to discharge. The problem, however, is determining with this record on summary judgment what portion of the fees awarded were for prepetition as opposed to postpetition conduct. The record is far from clear, as the court's award simply awards a lump sum based on the entire history of the dissolution proceedings. For this reason, this Court cannot determined on summary judgment what portion of the attorneys' fee award is attributable to Nicholas' postpetition conduct.
Further, even if the award could be separate into its pre and postpetition components, Barbara contends that the entire award is nondischargeable as the court intended the award to be in the nature of support and therefore nondischargeable pursuant to 11 U.S.C. section 523(a)(5). This determination suffers from the same problem as determining what part of the award is for prepetition versus postpetition conduct. The state court's decision is not clear.
In Arizona, a court may order one party in a dissolution proceeding to pay the other party's reasonable attorneys' fees and costs. Arizona Revised Statute section 25-324, upon which the award was made, allows the court to consider the financial resources of the parties and the reasonableness of the parties in determining such an award. In this case, the court noted that it considered the reasonableness of the parties' positions, their respective financial positions, their ability to pay and whether the parties acted in good faith in reaching its decision. As the parties themselves acknowledge, courts have found that attorneys' fee awards based on financial needs may be considered in the nature of support and nondischargeable. See In re Gibson, 103 B.R. 218 (9th Cir. BAP 1989); In re King, 15 B.r. 127 (Bankr. D. Kan. 1981). The fact the court considered the parties' ability to pay and their respective financial positions suggests that the court may have intended the fees, or some portion thereof, to be in the nature of support. However, the court also considered the parties' behavior throughout the litigation, which would support more of a penal intent to the court's award. It simply is not possible to tell based on this record.
For the following reasons, therefore, the Court denies Debtor Nicholas Lees' motion for summary judgment and Barbara Lees' cross motion for summary judgment. A trial will be needed to determine, one, what portion of the state court's fee award is attributable to Debtor's prepetition conduct versus what portion is attributable to his postpetition conduct and, two, what portion of any fees awarded as a result of Debtor's prepetition conduct were intended by the state court to be in the nature of support or maintenance.
IT IS HEREBY ORDERED that a Rule 16(b) Scheduling Conference will be held on August 2, 2007, at 11:00 a.m., before this Court at the United States Bankruptcy Court, 230 N. First Avenue, Sixth Floor, Phoenix, Arizona 85003.
So ordered.