Tennessee bankruptcy court examines standards for taxation of fees under §523(d)

In Dr. Gil Center for Back, Neck and Chronic Pain Relief v. Rigney (In re Rigney), 2021 Bankr. LEXIS 2824, Case no 4:20-bk-12437-NWW, Adv No 4:21-ap-01002-NWW (Bankr. E.D. Tenn. 12 Oct 2021) the court denied a request for taxation of fees in a complaint filed under §§523(a)(2)(A), (a)(4), and (a)(6).  The case arose from a prepetition auto accident and an assignment of insurance benefits to the plaintiff.  The defendant received $25,000 from insurance, but failed to pay the $4,835 owed to the doctor’s office.  The defendant then filed for relief under chapter 7, and on 14 September 2020 the plaintiff filed a complaint for nondischargeability under the above sections.  The §523(a)(2)(A) count was dismissed by summary judgment on 8 July 2021, and the remaining issues tried on 16 August 2021, resulting in a judgment for the defendant.  A request for taxation of fees was then timely filed on 27 August 2021.

The court first examined the language of §523(d).

  If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.

11 U.S.C. 523(d).  This section requires satisfaction of four elements: 1) the creditor requests a determination of dischargeability under 11 U.S.C. 523(a)(2),  2) the debt is a consumer debt, 3) the debt is discharged, and 4) the creditor’s position lacks substantial justification.1   While the debtor bears the burden of proof on the the first 3 elements, the creditor must show that it’s position was substantially justified.2   If the creditor fails this showing, then the court considers whether special circumstances would make an award of fees unjust.3

  Finding the first three elements met in this case, the court examined the details of the application.  The defendant’s request for $12,120 in fees did not break down the fees devoted to defending the §523(a)(2)(A) count as opposed to defending the other counts.  Clearly any fees incurred after the dismissal of that count by summary judgment would not be recoverable, as the statute only permits fees for defense of that count.  As to fees incurred prior to dismissal of the §523(a)(2)(A) count, it was not possible for the court to determine how much of the time was spent in defense of that count as opposed to the other counts in the complaint.
  Even if such fees were broken down by each count, the court still found that the Plaintiff was substantially justified in asserting its claim under §523(a)(2)(A), and therefore no fee shifting was justified.  The Court noted that §523(d) was modeled after the Equal Access to Justice Act, under which ‘substantially justified’ has been interpreted to mean that the claim has a reasonable basis in both law and fact.4   Under §523(d) a creditor must show 1) there is a reasonable basis for the facts asserted, 2) there is a reasonable basis in law for the legal theory proposed, and 3) there is support for the legal theory based on the alleged facts.5
  While the summary judgment order found that there was no evidence that the defendant made any false representations in order to obtain medical treatment, §523(a)(2)(A) also encompasses debts incurred by actual fraud.  Actual fraud does not require a misrepresentation by the debtor, but includes acts of deceit, artifice, trick or design intended to hinder, delay, harm, or cheat another.6  The allegation in the complaint that defendant misappropriated insurance proceeds in which the plaintiff had a legal interest, if accompanied by the required fraudulent intent, could constitute actual fraud as contemplated under 11 U.S.C. 523(a)(2)(A).  This provides the reasonable basis in law for the plaintiff’s reliance on §523(a)(2)(A) in the complaint.

See, e.g. Rochester Hills Chrysler Plymouth v. Phillips (In re Phillips), 135 B.R. 758, 763 (Bankr. E.D. Mich. 1993).

See e.g. Am. Sav. Bank v. Harvey (In re Harvey), 172 B.R. 314, 317 (B.A.P. 9th Cir. 1994).

Phillips, 153 B.R. 1t 763

Pierce v. Underwood, 487 U.S. 552, 565, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988).

Fia Card Serv. N.A. v. Dunbar (In re Dunbar) No. CV 11-159-M-DWN, 2012 U.S. Dist. LEXIS 67852, 2012 WL 1757427 at *2 (D. Mont. 2012).

Haney v. Copeland (In re Copeland), 291 B.R. 740, 760 (Bankr. E.D. Tenn. 2003).

Michael Barnett
Michael Barnett, PA
506 N Armenia Ave.
Tampa, Fl 33609-1703
813 870-3100