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Bankruptcy and Attorneys Fees in Texas Divorce Proceedings

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Attorney’s Fees In Divorce Proceedings: Do They Fit Within The Exception to Discharge in

Section 523(a)(5)?

One of the central pillars of Texas bankruptcy code is the idea that a deserving debtor is entitled to a fresh start. However, the drafters of the code recognized that there are certain types of debt that are of such great importance. Consequently, the drafters enacted section 523 of the bankruptcy code, which makes certain types of debt statutorily non-dischargeable. For example, section 523(a)(5) provides that “a discharge under section 727… of this title does not discharge an individual debtor from any debt for a domestic support obligation.” A domestic support obligation is defined as a debt “in the nature of alimony, maintenance, or support… owed to a former spouse, spouse, or descendent of the debtor.” 11 U.S.C. §101(14)(a). Section 523(a)(5) of the code echoes congressional recognition of the importance of a debtor’s obligation to his family. See In re Brooks, 371 B.R. 761. 766 (N.D Tex. 2007). Additionally, whether a specific obligation constitutes maintenance, support, or alimony within the definition or understanding of discharge exception for domestic support obligations is a not a matter of state law; rather, it is a legal issue of federal bankruptcy code/law. In re Jospeh, 16 F.3d 86, 87 (5th Cir. 1994).

 

When interpreting section 523 of the bankruptcy code, bankruptcy courts will “generally look beyond the labels which state courts, and even the parties themselves, give to obligations which debtors seek to have discharged.” Milligan v. Evert (In re Evert), 342 F.3d 358, 362(5th Cir. 2003). Furthermore, whether an award for attorneys’ fees in divorce proceeding is in the nature of alimony, maintenance, or support, within the meaning of domestic support obligation in section 523(a)(5), depends on the state court’s intent in making the award. See In re Pino, 268 B.R. 483, 489. (Bankr. W.D. Tex. 2001). Bankruptcy courts will place substance over form when determining the true nature and purpose of the obligation. See In re Jospeh at 88. Thus, when applying section 523(a)(5), bankruptcy courts will look to whether the debt owed arises out of the dissolution of the parties’ marriage. However, there is still a lack of clarity regarding the dischargeability of debts in the nature of domestic support that are directly payable to a third party. Specifically, bankruptcy courts have had a difficult time ascertaining whether attorney’s fees constitute domestic support obligation.

 

There are two main issues that bankruptcy courts must address when deciding whether an award of attorneys’ fees meet the definition of a domestic support obligation: (1) the awards must be in the nature of alimony, maintenance or support; (2) the awards must be owed to or recoverable by a former spouse. The first inquiry for the bankruptcy court to answer is whether the awards are in the nature of alimony, maintenance, or support. Whether an award for attorneys’ fees in a divorce proceeding is in the nature of alimony, maintenance, or support depends on the state court’s intent in making the award. See In re Pino at 489. Bankruptcy courts are more likely to deem attorneys’ fees in divorce proceeding as domestic support obligations, and thus nondischargeable, if the award specifically itself shows a balancing with respect to the parties’ financial needs. See In re Joseph at 88. Moreover, bankruptcy courts will look at relevant factors such as “disparity in earning power of the parties, their associative business opportunities, physical situation of the respective parties, their expected future situation of need to receive support, their educational situation of the parties, and benefits that they would have been recipient of if the marriage continued.” Id. Furthermore, courts will deem attorney fees as non-dischargeable if the purpose is to provide for the benefit, support, or best interests of litigants’ minor children. If the purpose of the underlying proceedings in which the awards for attorneys fees arise is to provide for the benefit, support or best interest of the litigants minor children, then the awards constitute domestic support obligations. See In re Hudson at 357.

 

The second inquiry for the Texas bankruptcy specific court to answer is whether an award for attorneys’ fees that otherwise meets the definition of a domestic support obligation, but may be recovered directly by the attorneys, is nondischargeable according to section 523(a)(5). See In re Kassicieh, 425 B.R. 467, 472 (Bankr. S.D. Ohio 2010). Some courts have had held that awards of attorneys’ fees are not domestic support obligations because a law firm “is not an entity to whom a domestic support obligation may be owed under section 523(a)(5).” In re Brooks at 764. The law firm in In re Brooks had intervened in the divorce proceeding and obtained separate awards against the debtor and his former spouse. Moreover, the debtor was not liable, either to the law firm or to his former spouse, for the award against the former spouse, and the spouse was not liable for the award against the debtor. See In re Brooks at 763. Therefore, the court found that the award might not be owed to or recoverable by the debtor’s spouse or former spouse because the award was made directly to the attorneys and only to the attorneys. A different situation occurred in In re Hutton. In that case, the awards at issue were awarded to debtor’s former spouse, and the former spouse remained liable for her attorneys’ fees in the event that debtor did not pay. See In re Hutton at 828. This payment structure was sufficient for the court to conclude that the awards were for the benefit of debtor’s former spouse because they relieved her of an obligation for which she would otherwise be liable. See Id.

Therefore, if the bankruptcy court finds that the attorneys’ fees are in the nature of alimony maintenance or support, and if the debtor’s former spouse remains liable for the attorney’s fees, then the bankruptcy court is most likely going to find that the attorneys’ fees fit within the exception to discharge in section 523(a)(5).

 

 

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