An award of attorneys’ fees to a municipal government under a state fee-shifting statute did not qualify as a nondischargeable fine or penalty in favor of a governmental unit.
The appeal before District Judge David M. Lawson of Detroit invoked Section 523(a)(7), which gives a government unit a nondischargeable debt for a “fine, penalty or forfeiture” that “is not compensation for actual pecuniary loss.”
Michigan law requires the parties in a civil litigation to undergo a case evaluation by a panel of lawyers who make an evaluation about the case’s value. If someone rejects the valuation and does not achieve a better outcome at trial, the law requires that party to pay the winner’s “actual costs,” including “a reasonable attorney fee.”
The woman sued the county, her former employer, under whistleblowing statutes. The evaluation said her claim was worth $290,000. Both sides rejected the recommendation. At trial, the county won, and the woman got nothing. The state court proceeded to assess about $190,000 of the county’s attorneys’ fees against the woman, who then filed a chapter 7 petition to discharge the debt.
The county filed a complaint to declare the award nondischargeable under Section 523(a)(7). The bankruptcy judge held that the fee-shifting award was dischargeable, and the county appealed, only to lose again in Judge Lawson’s July 26 opinion.
On two grounds, the county was proposing a “strained reading” of the statute, Judge Lawson said.
Although some state court decisions characterized the awards as sanctions or penalties, Judge Lawson said that the state rule itself used neither term. Instead, he said the statute awards “actual costs” and attorneys’ fees in “compensation for the injured party’s loss.” A penalty, on the other hand, means “a punishment,” and the statute says nothing about punishment.
There was also “no doubt,” Judge Lawson said, that the award was for “actual pecuniary loss.”
“Any sensible reading” of “actual costs,” he ruled, cannot mean “anything other than compensation for the unwarranted expense of fruitless litigation.”