Attorney’s Fees Are Dischargeable In Client’s Bankruptcy Absent Proof Of Client’s Fraudulent Intent

| Nov 3, 2013 | Firm News

The Bankruptcy Appellate Panel of the First Circuit has affirmed a holding that an attorney’s fees for services rendered to the debtor were discharged where the attorney failed to establish that the insured fraudulently retained her.

The attorney represented the debtor in pre-petition divorce proceedings. The court hearing her divorce entered an order requiring her husband to advance $25,000 to defend her. The attorney accepted the $25,000 as a retainer and sent the debtor a letter memorializing their agreement that the debtor would pay the attorney $400 an hour to be charged against this retainer and that the debtor would pay any sums exceeding the retainer. The divorce proceedings were complicated and time-consuming although the debtor and her husband eventually reconciled. The attorney sent Brady-Zell a bill for legal services in the amount of $87,432.54, against which she credited the $25,000.00 retainer, leaving a balance of $62,432.54. The debtor did not pay the bill and the attorney sued in state court. The debtor filed a Chapter 7 petition.

The attorney filed an adversary proceeding arguing that the debt was nondischargeable because it arose from a false representation, i.e., that the debtor never intended to pay the fees above the retainer. After a trial on the merits, the bankruptcy court found the debtor was not credible with respect to various arguments she made, e.g., that she did not consent to the agreement the attorney had memorialized, that she did not expect the bill to exceed $25,000, and that she had not made repeated promises to pay, as the attorney testified. Nonetheless, the bankruptcy court found the attorney had failed to prove that the debtor had had fraudulent intent when she entered into the fee agreement or during the period of the attorney-client relationship when she made the promises. Because the burden of proof was on the claimant, the bankruptcy court entered judgment for the debtor.

The BAP confirmed the attorney had the burden to prove fraudulent intent. It said the debtor’s mere failure to pay did not establish fraudulent intent. It held that the bankruptcy court’s finding that the debtor lacked fraudulent intent was not clearly erroneous. It affirmed the bankruptcy court’s holding.

In Re Brady-Zell, BAP NO. MB 13-019, 2013 WL 5778957 (1st Cir. BAP Oct. 24, 2013)

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