Non-dischargeability actions by a creditor against a bankruptcy debtor are somewhat rare, but when they occur, the legal fees and costs involved in defending against such an action can be prohibitive. Most debtors in a bankruptcy case will never need to confront a non-dischargeability action under 11 U.S.C. §523(a), but for clients with more complex bankruptcy cases under Chapters 7, 11, or 13, or for clients who have made significant pre-bankruptcy transactions, such actions often are more frequent and must be addressed. At Nova Law Group, we feel that keeping legal costs to as low a level as possible during bankruptcy litigation is just as important as representing the client in the best possible manner given the circumstances of the case. This article will discuss methods in which non-dischargeability actions can be defended in a cost effective manner for bankruptcy clients.
Most non-dischargeability actions against a debtor are based upon either specific allegations of fraud, under 11 U.S.C. §523(a)(2)(A-B), or a presumption of statutory fraud under 11 U.S.C. §523(a)(2)(C). While the specifics of defending against this type of action for a client is discussed in the article “What is a Non-Dischargeability Action?” (also on this website), it is important to note that any non-dischargeability action must allege sufficient facts to state a claim under one or more sections of 11 U.S.C. §523, and that even if a presumption of fraud is alleged to be applicable under 11 U.S.C. §523(a)(2)(C), that such presumption may be rebutted.
For example, many junior attorneys often ask the managing attorney of our firm if they should settle an action on behalf of a client with a creditor, merely because such creditor claimed that the “client made luxury purchases within the 90 day period prior to filing bankruptcy.” Typically, such allegations by a creditor are made without any specific facts alleged as to which purchases made were fraudulent prior to bankruptcy, when the fraudulent charges were made, where they were made, and why such purchases might be considered “luxury goods” under 11 U.S.C. §523(a)(2)(C)(i)(I) for purposes of the statutory presumption. Many creditors attempt to make blanket claims of fraud against the debtor which lack substantive merit, thinking that most bankruptcy debtors will never challenge the action, or will settle to avoid paying legal fees and costs to the debtor’s bankruptcy lawyer.
Accordingly, it is a fair question to ask how a bankruptcy client can afford to pay his or her bankruptcy attorney to defend a meritless non-dischargeability action against the client in a cost-effective manner. The answer is often the statutory language provided in 11 U.S.C. §523(d), which allows for bankruptcy debtors to receive reimbursement for attorney fees and costs from the creditor that sued them, at least where the debtors can prove that such action was meritless (as it often is).
The bankruptcy code states under 11 U.S.C. §523(d) that a bankruptcy debtor can recover attorney’s fees and costs from a creditor that sued such bankruptcy debtor unsuccessfully, if the court finds that the suit filed by the creditor was not “substantially justified,” unless “special circumstances” would make the award of such fees and costs unjust. 11 U.S.C. §523(d) (2012). Essentially, to obtain an award against a creditor for fees and costs in the non-dischargeability action, the bankruptcy debtor must not only win the case, but also convince the judge that the creditor’s original suit in bankruptcy court had no merit to begin with, and that the creditor can afford to pay the legal fees and costs if awarded. While this might seem like a difficult task in most situations, in reality, most non-dischargeability actions filed are objectively meritless and often insufficient to meet federal pleading requirements. As a result, it is often a good idea for a debtor’s bankruptcy attorney to file motions to dismiss meritless actions under Federal Rules of Civil Procedure 12(b)(6), rather than answer a meritless complaint, as a victory at the motion to dismiss stage will often mean that the court views such complaint as not “substantially justified,” and legal fees and costs will be much easier to obtain. Fed. R. Civ. Proc. 12(b)(6) (2012). In essence, it is much easier to argue that a creditor’s action is not “substantially justified” when the court itself has dismissed the action for failure to state a claim multiple times, as it will be difficult for a creditor to argue that its action “was substantially justified” under 11 U.S.C. §523(d) if the court already found the action to be “insufficient to state a claim for relief.” Additionally, it is the experience of Nova Law Group that most creditors’ attorneys have no idea how to litigate a motion to dismiss adequately, and as a result, often will settle such actions in a manner favorable to the bankruptcy debtor when confronted with skilled opposition from the debtor’s bankruptcy attorney.
In conclusion, a client should always be sure that the bankruptcy attorney representing him or her is aware of the necessary steps to effectively defend against a non-dischargeability action, as well as the cost-saving provisions of 11 U.S.C. §523(d) for recovery of attorney’s fees and costs in such an action. This provision can not only serve as a very significant cost-savings to a bankruptcy client, but also can operate as a significant deterrent to any creditor contemplating an action in bankruptcy court against the debtor. If you would like to learn more about effective representation of bankruptcy debtors in non-dischargeability actions or would like to consult with a Nova Law Group attorney regarding your individual situation, feel free to contact a bankruptcy attorney of our office and we will be happy to assist you.
