UNDER ADVISEMENT DECISION RE: DISCHARGEABILITY OF STATE COURT AWARD OF ATTORNEY FEES

CHARLES CASE II, Bankruptcy Judge

I. Introduction

At issue is the allocation of a state-court award for attorney fees in a divorce proceeding between pre- and post-petition periods. Further at issue is whether the portion of the fees awarded for Defendant's prepetition conduct is non-dischargeable because it was intended by the state court to be in the nature of support or maintenance.

II. Background

Plaintiff Barbara Ann Grimes ("Grimes"), fka Barbara Lees, filed for divorce from Defendant in October 2000. On April 14, 2003, Defendant filed a Chapter 11 petition in this Court that was converted to a Chapter 7 petition on June 19, 2003. Immediately after Defendant filed the original Chapter 11 petition, Plaintiff, on May 2, 2003, filed a Motion for Relief from the Automatic Stay so that she could proceed with her pending, domestic relations case in Arizona state court. On July 2, 2003, the Court lifted the automatic stay so that the domestic relations litigation could proceed concerning all issues involving child custody, child support, spousal maintenance, dissolution of the marriage, and all matters related to the issues, including but not limited to contempt proceedings and entry of monetary awards in the domestic relations litigation.

On November 21, 2006, the state court issued an order awarding Plaintiff $300,000 in attorney fees and $15,000 for costs incurred in the dissolution proceeding. Defendant then filed a Motion for Summary Judgment, on December 20, 2006, arguing that the fees were dischargeable. Plaintiff filed a Response and Cross-Motion. This Court issued an under advisement decision on July 5, 2007, addressing the Motion and Cross-Motion and finding, based on In re Ybarra, 424 F.3d 1018 (9^th Cir. 2005), that a debtor cannot insulate himself from postpetition actions simply because they may be related to or part of the same course of prepetition conduct. In re Ybarra at 1023. Defendant is not allowed to escape responsibility for attorney fees that were incurred due to his own unreasonable litigation tactics and/or flagrant abuse of the court system. The Court instructed parties that a trial, however, would be necessary to determine what portion of the state court's fee award is attributable to Debtor's prepetition conduct versus what portion is attributable to his postpetition conduct and what portion of any fees awarded as a result of Debtor's prepetition conduct were intended by the state court to be in the nature of support or maintenance.

On August 2, 2007, a Rule 16(b) scheduling conference was held. At the hearing, the Court instructed parties that, in order for the Court to make an informed decision regarding the intention of the state court in awarding attorney fees, parties must provide evidence that the state court intended the fees to be in the nature of support. The Court further instructed parties that because the state court order entered on November 21, 2006, is not clear as to whether the fees were awarded in the nature of support or more for punitive reasons, it would be of great benefit if the parties would obtain a transcript or minute entry of the hearing involving the award of the fees to determine the intent of the state court. The Court further instructed that a brief summary of what the state court said regarding the award of fees also would be useful if a transcript is not available. Parties also were directed to submit to the Court a statement of their attempts to acquire a transcript, and if a transcript does not exist, they were to figure out how to meet the burden with regard to the issue of what fees are in the nature of support.

On August 22, 2007, Plaintiff submitted an Affidavit of Ivan K. Mathew regarding the fees and costs incurred by Plaintiff in the state court litigation. Defendant filed a copy of the July 18, 2006, state court order and a Response to the Affidavit on September 26, 2007, to which Plaintiff filed a Reply on October 9, 2007. At the Rule 16(b) Scheduling Conference, held on September 13, 2007, the Court again asked how do we get to the question as to what the state court intended in the order awarding fees. The Court discussed with both parties the importance of transcripts or recordings of state court hearings regarding the $315,000 award to Plaintiff.

Neither Plaintiff nor Defendant have provided to the Court any documentation of attempts on their part to obtain any transcript, recording, or minute entry of state court proceedings that addresses the rationale of the court for the November 21, 2006, order awarding Plaintiff $300,000 in attorney fees and $15,000 in costs. On December 4, 2007, parties, however, submitted to the Court a Joint Notice Regarding Under Advisement Issue, in which both parties affirm that they have fully briefed the question of whether attorney fees awarded by the state court to Plaintiff and against Defendant were due to fees incurred both before and after Defendant filing his bankruptcy and that they believe the question of whether the prepetition fees and costs are nondischargeable is ripe.

III. Analysis

A. Issues to be Decided

There are two issues to be decided. First, what portion of the award of $300,000 in fees and $15,000 in costs relates to pre-petition activity and what portion to post-petition activity. The post-petition portion will be found non-dischargeable in accordance with the Under Advisement Decision. Second, what portion, if any, of the pre-petition award relates to support and what portion, if any, was awarded as a sanction for the debtor's overly zealous litigation strategy. In accordance with the Under Advisement Decision, the support amount will be non-dischargeable and the sanction amount will be dischargeable.

B. The Pre- and Post-Petition Allocation

The Judgment signed by Judge Mangum incorporates the award made by Judge Lee following application by counsel for Grimes. Judge Mangum did not make an independent assessment of the fees; rather, his handwritten interlineations to the form of judgment submitted by Mr. Mathew make clear that (1) he was making no finding that the fees related to support and (2) amounts had already been determined by Judge Lee and were related to "litigation." Fees incurred after the Judge Lee award, or that were not requested in the application made to Judge Lee, cannot be considered in determining the appropriate allocation. Although Grimes claims that the amounts set forth in the current Mathew affidavit and the amounts sought before the state court are the same, a review of the two documents suggests the contrary. On November 16, 2006, Mathew filed his supplement to the fee application and detailed all the charges sought. That summary includes a total of $266,075 for fees incurred by his firm; the detailed billing attached to his affidavit includes a total $328,746; the discrepancy of $62,671 is not explained, although it is denied. The court finds that the appropriate starting point is the request made to the state court as detailed on pages 3 and 4 of the Supplement.

This inquiry is complicated by the fact that Grimes engaged many counsel and other professionals over the course of the almost seven years from the filing of the dissolution petition until the entry of the final judgment by Judge Mangum. In addition to Mathew, other professionals included Feldman, Galbut, Meyer, Jaburg, Collins, Romley, Harner and Siesco. Billing statements for each of these professionals were included in the applications to the state court and totaled over $427,000 in fees and nearly $22,000 in costs. It was based upon these figures that the state court awarded $300,000 in fees and $15,000 in costs on November 21, 2006.

While the great bulk of Mr. Mathew's fees (all but about $4,700) were incurred post-petition, the fees incurred by several of the other professionals were either entirely (in the cases of Meyer, Jaburg and Romley) or largely (in the case of Galbut) pre-petition. There is nothing in the record to suggest that Judge Lee disallowed only the fees for some professionals but allowed all of the fees of others. On the contrary, it is more reasonable to conclude that he considered the totality of the fees and costs requested and reduced the amount to be charged to debtor on a pro rata basis.

For this reason, Lees counsel suggests that the best way to allocate the actual award is to determine an overall ratio of pre- to post-based upon the amounts requested and apply that factor to the amount awarded. Although belittled by Grimes counsel as "meaningless", "complicated" and "misleading," the approach in fact is sound and makes sense under the circumstances. Grimes complains that applying this factor would result in a "double reduction" because Judge Lee has already reduced the fee request once. This wildly misses the point. All this Court can do is determine what portion of the award actually made by the state court survives the Debtor's discharge. Other fees incurred by Grimes that the state court declined to award are simply not an obligation of Lees; this Court certainly does not have jurisdiction to determine the amount of fees to be awarded in a state court divorce case; that decision has already been made, as it should be, by the state court. Indeed, Grimes goes on at length about the remarkable series of findings made by numerous state court judges concerning the abusive litigation tactics of Lees and, with that knowledge, Judge Lee made the reductions and entered the award of $315,000. What this Court is called upon to decide is an allocation of that amount, not a reduction.

With that said, the calculus suggested by Lees is not entirely correct. All of the fees requested were presumably considered by the state court, including bankruptcy fees incurred to Collins. Therefore, all of them should be part of pre- and post-petition ratio calculation. This yields a factor of 71.75%. As to the costs, the court will accept the rate yielded by Lees' counsel's arithmetic of 80.69% This yields a post-petition, non-dischargeable amount of $215,261 in fees and $12,103.50 in costs.

C. Whether the Pre-petition portion of the award is non-dischargeable

As noted, the parties have provided little new illumination on the intent of the state court in making the fee award. However, there is the following. Judge Mangum clearly was of the view that the award made by Judge Lee was not in the nature of support; indeed, he excised any language in the form of the judgment that would have supported such a conclusion. Rather, he found that the award was "related to litigation." This directly suggests that award was not in the nature of support but rather in the nature of a sanction. This conclusion is completely consistent both with the lengthy history of the divorce action in which multiple judges have found Lee's conduct to be despicable and with the lack of findings by the various judges necessary for an award in the nature of support. However, somewhat perversely, an sanction order of attorneys fees arising out of abusive litigation is not within the ambit of Section 523(a)(5) and therefore is dischargeable unless covered by one of the other subsections of Section 523 for which a claim has been timely asserted.

Here, what Grimes has chosen to litigate is whether the award was in the nature of support. The record does not support such a conclusion. Therefore, judgment will be granted to Lees under Section 523(a)(5) on the dischargeability of the pre-petition portion of the Judge Lee fee award, as included in the Final Judgment signed by Judge Mangum.

D. Payments from the Estate

Lees suggests that the payments already received from the estate should be credited his non-dischargeable liability, reducing it to nearly zero. This is incorrect. Amounts received from the estate are on account of a creditor's total claim that, in normal circumstances, is discharged. It is an essential part of the "bankruptcy bargain" that a debtor's non-exempt assets be liquidated and paid to creditors in exchange for a discharge of those creditors' claims. It would distort the normal distribution process if estate distributions were credited first to non-dischargeable obligation. On the other hand, the creditor is not entitled to be paid twice. Therefore, any amounts received from the estate should be credited first to the discharged portion of the debt and thereafter to the non-dischargeable portion. To the extent the non-dischargeable portion remains unpaid, that liability remains.

Counsel for Lees is to submit a form of Judgment.

So ordered.