New York Bankruptcy Help

The Bankruptcy Code severely limits your ability to discharge “domestic support obligations” in bankruptcy.  But what if part of the award is for legal fees that your former spouse incurs in getting you to pay for child support or spousal maintenance?

Michael Schenkein filed a Chapter 7 bankruptcy in Manhattan after what appears to be a long battle with his former spouse in numerous domestic support enforcement proceedings regarding his failure to pay the obligations imposed by their divorce settlement agreement. His ex-wife then filed an adversary proceeding in the bankruptcy court seeking to have the debts due to her classified as nondischargeable as domestic support obligations.

Those debts included not only the actual maintenance and child support obligations, but also legal fees to his ex-wife in connection with her state court actions against him. In other words, the New York state court told him to pay her legal fees for chasing him down.

Legal Fees Payable As A Result Of The Divorce And Contempt Actions

The U.S. Bankruptcy Court for the Southern District of New York, in the case of Mordas v. Schenkein, 09-01947 (AJG) (Bankr. S.D.N.Y. 2010) looked solely to the law to hold that not only was Mr. Schenkein on the hook for the maintenance and child support obligations but also his ex-wife’s legal fees. The court did, however, leave the door open for the former Mrs. Schenkein to get even more legal fees from her ex-husband.

To render the decision as to the legal fees, the bankruptcy court looked solely to 11 U.S.C. § 523(a)(5) and (15).  § 523(a)(5) provides that debts relating to a “domestic support obligation” are precluded from discharge, while under § 523(a)(15) any debt owed to a spouse or child that is “incurred by the debtor . . . in connection with a separation agreement . . . or other order of the court of record” is non-dischargeable.  Here, the legal fees were awarded to Mr. Schenkein’s ex-wife as a result of contempt actions she took because he wasn’t paying the original debt or the arrears due.  The state court had made clear that the legal fees awarded were intended to compensate her for the costs incurred as a result of the his failure to meet his support obligations.

Moreover, since BAPCPA, bankruptcy courts in New York have recognized that attorney’s fees awarded in a divorce proceeding are non-dischargeable under § 523(a)(15) regardless of whether or not the fees are considered to be in the nature of support or for some other purpose.

Legal Fees In Connection With Filing The Non-Dischargeability Action

None of this is stunning to the bankruptcy lawyer who bothers to read the Code and decisions issued by the New York bankruptcy courts.  What does bug me, however, is the fact that the judge specifically left open the door to the debtor’s ex-wife going back into state court and tacking on even more legal fees in connection with her lawsuit filed in bankruptcy court.

Judge Gonzalez notes that any legal fees ordered in connection with the bankruptcy lawsuit would be post-petition debts not subject to the bankruptcy discharge.  That’s true enough, but he goes the next step and dismisses out of hand the question of whether Schenkein should be ordered to pay such amounts at all.

As a general rule, attorney’s fees should not be awarded to the prevailing party in an adversarial proceeding. See In re Sokolowski, 205 F. 3d 532, 533 (2d Cir. 2000). In a case involving “issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party.” Id. Here, Gonzalez states that “the issues at hand were primarily, if not entirely, related to federal law. Therefore, this Court does not grant the Plaintiff’s request for attorney’s fees.”

He then says:

However, this Court does recognize that this action was initiated in order to maintain enforceability of the numerous state court rulings ordering the Defendant to pay all debts owed to the Plaintiff. As a result, there may be grounds for a New York court to award the Plaintiff attorney’s fees under DRL sections 237(c) and 238, if the Plaintiff decides to bring such an action in that court.

The upshot is that we’ve got a debtor in Chapter 7 bankruptcy facing debts that can’t be discharged.  And now he’s going to be looking at the potential of more fees after his bankruptcy is discharged.  Not only fees due to his ex-wife, but also to his own lawyer for defending him in state court when she sues.

How To Limit Your Post-Bankruptcy Exposure In Domestic Support Obligation Disputes

First off, let’s be clear on one thing – I do not have any particular insight as to how Mr. Schenkein’s lawyer handled his case.  I don’t know what went on behind the scenes, or if there were any negotiations.  But it seems to me that his bankruptcy lawyer should have known about how this was all going to play out.  And with that in mind, it seems logical to do something lawyers don’t like to do – get on the phone.

Getting on the phone and calling the ex-spouse’s lawyer would be a great way to avoid all the legal turmoil in the first place.  Be upfront about it, and acknowledge that the debt isn’t going anywhere in bankruptcy.  Sign an agreement if need be acknowledging it, and move on.

What happens in such a case?  Does the debtor lose?  Not at all.  The debtor merely comes to the table with the realization that the bankruptcy isn’t going to discharge the domestic support obligations.  In doing so, he saves himself the possible post-bankruptcy action in state court which will likely result in nothing more than more legal fees out of his pocket.

You may download the Mordas v Schenkein decision here.