Bankruptcy Judge Timothy A. Barnes of Chicago displayed tools a judge can use to help a debtor who may have had a meritorious defense but could not afford to defend a dischargeability suit.
The creditor was the chapter 7 debtor’s former matrimonial counsel. The lawyer filed a complaint contending that $47,000 in unpaid legal fees were nondischargeable under Section 523(a)(2)(A) for having been obtained by false pretenses or false representation. The lawyer sought a declaration of nondischargeability and a judgment for $47,000.
The debtor moved to dismiss the complaint, but Judge Barnes had denied the motion because it made a plausible claim.
In his March 5 opinion, Judge Barnes recounted how he had said at the time that the complaint might not survive a motion for summary judgment. He also had said that the complaint was based on “mere broken promises to pay, which are not generally actionable under section 523.” In addition, he had observed that the creditor, a lawyer, might have been using his legal skills “to bring actions of questionable merit against former clients who, because of their financial circumstances, were likely to be unrepresented and therefore to settle or default.”
After denial of the motion to dismiss, the debtor’s counsel withdrew. When the debtor did not answer the complaint or defend, Judge Barnes found the debtor in default. Rather than simply enter judgment in favor of the creditor for the relief sought in the complaint, Judge Barnes scheduled a hearing to “further investigate” and determine the amount of damages.
Again, the debtor did not appear and defaulted. Even though the complaint was “well-pleaded,” Judge Barnes said that the creditor “must still prove the amount of damages to be awarded.” As a matter of law, it was “unclear” to him whether “the Debtor actually owes [$47,000] for such services,” because Illinois law requires legal fees to be “reasonable.”
Although the lawyer “may be owed over $47,000,” Judge Barnes said that the lawyer “has not shown conclusively that he is owed that amount.” [Emphasis in original.]
Judge Barnes might have scheduled a trial to fix the amount of a judgment and the amount of the nondischargeable debt, but he didn’t. Instead, he used two techniques to slow the lawyer’s progress toward a judgment excepted from discharge.
Before Stern v. Marshall, 564 U.S. 462 (2011), the Seventh Circuit had “encouraged” bankruptcy courts to enter judgment for the amount of a debt excepted from discharge. After Stern, the Seventh Circuit said it was “unclear” whether the bankruptcy court has the power to fix the amount of a nondischargeable claim.
Most recently, Judge Barnes said, the Seventh Circuit allowed a bankruptcy court to decline to award damages in a nondischargeability suit and, instead, send the parties to state court for a remedy.
Judge Barnes therefore declined to enter judgment for the amount of the debt. Instead, he focused on the maximum amount to be declared nondischargeable.
At a time when the debtor had been seriously behind in paying her attorney, the lawyer had told her in a letter that he could not continue working “with the prospect you are going to pay me.” From that time forward, Judge Barnes said, it would not have been justifiable for the lawyer to rely on his client’s promise to pay.
With justifiable reliance ending at that time, Judge Barnes decided that legal fees incurred later were dischargeable. He therefore said he would declare that a debt for no more than about $15,700 in fees would be nondischargeable and that the remainder would be discharged.
Bankruptcy Judge Timothy A. Barnes of Chicago displayed tools a judge can use to help a debtor who may have had a meritorious defense but could not afford to defend a dischargeability suit.
The creditor was the chapter 7 debtor’s former matrimonial counsel. The lawyer filed a complaint contending that $47,000 in unpaid legal fees were nondischargeable under Section 523(a)(2)(A) for having been obtained by false pretenses or false representation. The lawyer sought a declaration of nondischargeability and a judgment for $47,000.
The debtor moved to dismiss the complaint, but Judge Barnes had denied the motion because it made a plausible claim.
In his March 5 opinion, Judge Barnes recounted how he had said at the time that the complaint might not survive a motion for summary judgment. He also had said that the complaint was based on “mere broken promises to pay, which are not generally actionable under section 523.” In addition, he had observed that the creditor, a lawyer, might have been using his legal skills “to bring actions of questionable merit against former clients who, because of their financial circumstances, were likely to be unrepresented and therefore to settle or default.”
After denial of the motion to dismiss, the debtor’s counsel withdrew. When the debtor did not answer the complaint or defend, Judge Barnes found the debtor in default. Rather than simply enter judgment in favor of the creditor for the relief sought in the complaint, Judge Barnes scheduled a hearing to “further investigate” and determine the amount of damages.