Attorneys' Fees Are Non-Dischargeable If They Are Traceable to Fraud

In Bartenwerfer v. Buckley (In re Bartenwerfer), BAP No. NC-19-1178-TaFB (April 23, 2020), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that the bankruptcy court correctly determined that all of the appellee's state court attorney's fees were non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).

Under 11 U.S.C. § 523(a)(2)(A), one of the exceptions to discharge is attorneys' fees that are traceable to fraud. In Bartenwerfer, the debtors sold their home to the appellee and falsely represented the condition the home was in. The appellee discovered the defects after the sale and sued the debtors in state court. After much litigation, the jury awarded the appellee damages, interest, attorneys' fees, and costs. The appellee filed a motion seeking attorneys' fees, but the debtors filed a Chapter 7 petition before the state court could hear the motion. The bankruptcy court awarded the appellee a set amount of non-dischargeable fees and interest at a set rate, from the time of the entry of the original state court judgment. The BAP affirmed the bankruptcy court's decision holding that all of the appellee's state court attorney's fees were non-dischargeable because they were traceable to fraud.

The BAP's reasoning for this decision was two-fold. First, the BAP reasoned that the bankruptcy court properly excused fee apportionment and found that the debtors failed to identify or explain why the appellee's fees were unrelated to his non-dischargeable fraud claim. Fee apportionment is a factual question that is not required if the issues in the various claims are so inextricably intertwined that it would be impractical or impossible to separate the attorney's time into compensable and non-compensable units. Because the appellee's claims were inextricably intertwined and incorporated the same core operative facts, fee apportionment was not required in this case. Second, the debtors were required to object to specific time entries in order to obtain a reduction or disallowance of fees, since fee apportionment was unnecessary. Instead, the debtors objected to all entries of block billing without specifically identifying which entries were problematic.

Thus, the BAP correctly held that all of the appellee's state court attorneys' fees were non-dischargeable because they were traceable to fraud. To avoid this discharge issue, debtors must be able to identify why certain fees are unrelated to the claims being litigated and must specifically identify potentially problematic billing entries.

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