Archive for the ‘ Trials ’ Category

Should legal losers pay the winners’ attorney fees?

My clients were nurses at a local hospital, immigrants from a third-world country.  They worked hard and bought a house.  One day, a fellow told them that their house had been built by a contractor without a license.  The fellow said that the house was therefore substandard, and he handed them an attorney’s card.  They contacted the opportunistic, aggressive attorney, started a lawsuit against the contractor, and lost.

Did I say they lost?  It was so much more than just losing.  They not only failed to get a judgment in their favor, a recovery of a few thousand dollars to compensate them for the lower value of the house, but the contractor countersued for attorney’s fees under the sales contract, and got a $1 million verdict.  The nurses’ attorney had been a bulldog, someone who refused to give up, and the builder had to pay a fortune to its attorneys to prevail.

Once the nurses’ wages began to be garnished, they contacted me.  I filed a bankruptcy to discharge this debt (they owed just about nothing else).  The builder didn’t like this, and sued them in bankruptcy court, claiming the $1 million attorney fee debt was nondischargeable.  The builder said that the nurses had engaged in “malicious prosecution,” and that this was a malicious tort under section 523(a)(6) of the bankruptcy code.

The debtors now have to pull together several tens of thousands of dollars to pay me to fight this dischargeability action.  They may lose just because they can’t afford to pay me for the full defense.  At the same time, I see some good ways to end this in their favor, and I am confident that they can prevail and discharge this debt: it wasn’t malicious prosecution.

I enjoy cases like this: tough legal issues, and the need to handle things economically.  I can’t run up a million dollars in legal fees here.

But this does reflect disturbing issues in the legal system.  We allow contingency fee arrangements to encourage attorneys to fight for people with few resources.  When we hire an attorney, we want him to fight for us as hard as he can.  Here, that fight backfired on the nurses: they now owe $1 million.  When people ask for a “loser pays” system, is this what they want?

When someone can’t pay their bills, we want them to be able to discharge them and start over, unless the bills are for specified kinds of debt: student loans, recent taxes, fraud, domestic support, malicious torts.  Debtors don’t have much money, and can’t fight creditors when the creditors chase them into the sanctuary of bankruptcy.  These cases often get resolved in very unsatisfactory ways: payments made by poor people to get rid of a claim that may have little merit.

Disclosing information

Attorneys often try to hide a client’s information, and disclose as little as possible about the client. This strategy sometimes has comical effects, as in this exchange I heard in a deposition:

“Q:       Do you remember where the main office for Gas del Lagarto  was located?

A:         Even though I was the officer and president of Gas del Lagarto at that time, four years ago today, I don’t recall if we had our main offices in El Paso or Ciudad Juarez.

Q:         How is it that you do you not recall whether the offices were in Texas or Mexico?

A:         You have to approach life like a movie: it has a beginning, a middle, and an end.”

 

Here is another highly amusing dramatization of hiding information. 

 

This kind of “hide the ball” mentality is incredibly frustrating for the questioning attorney, and litigants use it mostly to psych out the other side. It doesn’t make the witness look credible at all, and it benefits litigation attorneys handsomely because it drives legal fees up.

There is no place for this in bankruptcy. The debtor comes to the court seeking a release from his debts; in exchange, he needs to provide documentation that he has nothing to pay them with.  If anyone on the “other side” of the debtor, that is, the creditors, the trustee, or the judge, believes that the debtor is playing fast and loose with information, or hiding something, the debtor can only be hurt.  Penalties for failing to divulge required information range from the trivial to the criminal.

As a debtor, you should expect that a good bankruptcy attorney will give you advice on when and how to file bankruptcy. You should not expect that the attorney will dig you out of a hole you made by failing to provide documentation or information when you were asked for it.

We have been able to help debtors who thought it was to their advantage to hide information.  Usually, we counsel them to determine a coherent narrative that explains all the documentary facts, disclose the information, and advance the narrative. It works much better than trying to frustrate the other side.

You are a person who can’t pay your bills.  One day, a disheveled guy comes to your door, asks whether you answer to your name, and when you say “yes,” he hands you a summons in a state-court lawsuit seeking a money judgment for an unpaid debt.

Once you get the summons, you have 30 days to answer it.  You’re not going to answer, because it will cost you $400 to do so and you don’t really have a defense; you owe this money, you just can’t pay it.

If you don’t answer in 30 days, then the attorneys may file a request for a default judgment.  That usually takes about a month to get.

After they have the default judgment, they may take collection action.  That includes placing a lien on your house, garnishing wages, levying accounts, and dragging you down to their office for deposition to find out your social security number and your intimate financial details.

A bankruptcy filing will stop this process at whatever stage it has gotten to.  You won’t be able to recover money already levied or garnished, but you will be able to set aside a lien.

The tenant who wanted her rent back

My client was a landlady who rented her three-unit house not far from the beach in Ventura. The county came by one day and put yellow tags on two of the units, calling them “substandard” and evicting the tenants that day. Why “substandard?” Mostly because the area was zoned for one unit only: there was no way to have three units on the lot legally. But there were other, fixable, health and safety issues; the building was not the Ritz-Carlton.
Three months later, the landlady had demolished the units, short-sold the remaining house, and filed for bankruptcy protection.
The tenant in the middle unit didn’t want her to get off so easy. She filed an adversary proceeding, a lawsuit, in the bankruptcy asserting a nondischargeable debt: she claimed she was entitled to a refund of all the rent she had paid, since the unit was illegal the entire time and California law says you can’t collect rent on an illegal or uninhabitable unit. She claimed that the debt was nondischargeable, that is, the landlord should still owe it despite getting bankruptcy protection, because the landlord had collected each rent check by fraud, or because the act of renting the unit was a “willful and malicious” tort.
My client refused to settle: she didn’t see any reason she should refund rent for a period of time (three and a half years) when the tenant actually occupied the apartment without an express complaint. The tenant demanded a five-figure lump-sum payment to drop the case.
So we went to trial. Trials in bankruptcy court are blessedly short: no juries, just the judge, the parties, and the testifying witness. Not much chance to argue: the judge knew the law, and we had submitted briefs beforehand.
The tenant testified that she developed some questions about the legality of the units, and visited the city’s planning department. She discovered that the units were indeed illegal. “You didn’t bring this to the landlady’s attention then, did you?” “No,” the tenant admitted. “I was scared of her, and besides, I didn’t want to jeopardize the place where I was living, the benefit of my tenancy.”
The tenant also testified that she knew, from her first phone conversation with the landlady, that the unit she would rent had some issues. She took it anyway because she was desperate.
At the end of the trial, right after we finished our [short] closing arguments, the judge made findings of fact from the bench. No fraud, no willful and malicious tort, judgment for defendant. My landlady client was able to walk away from her debts, including this frivolous one.
Facts win cases; bad lawyering can lose them. Here, the facts spoke for themselves. Without a lawyer, however, the landlady would have been lost in the morass of procedures and evidence objections (who but a lawyer really knows what “hearsay” is?).
Even more so than other clients, bankruptcy clients need to make a cost-benefit analysis. Had the landlady not fought the case, she would have left her bankruptcy with a nondischargeable judgment of around $50,000. Her defense cost around $15,000. She might have settled for $15,000 before trial, but negotiations broke off. It’s up to the client to determine when to settle or go forward; the landlady went forward because of principle, but later regretted not just writing a check to settle. But who knows? Had she settled early on, she might have regretted that course of action too.
If you face a similar situation, a bankruptcy in Ventura or Los Angeles counties where someone wants to make sure you don’t get your discharge, we can help you at Faucher & Associates.