Attorneys’ Fees for Discovery Abuse Not Wiped Out in Bankruptcy

Most of a $133,000 default judgment will be discharged in a defendant’s bankruptcy case, but about $17,000 for attorneys’ fees related to his contempt of discovery orders will not be wiped out, a bankruptcy judge ruled.

Although the judgment was entered as a discovery sanction, the underlying debt is for breach of contract and is therefore dischargeable in bankruptcy. Only the portion of attorneys’ fees earned by the plaintiff specifically to enforce a state court order to answer discovery is nondischargeable, Chief Judge Eric L. Frank of the U.S. Bankruptcy Court for the Eastern District of Pennsylvania wrote Sept. 11.

Vision West, Inc. provided Addison Dane, Inc. with inventory on credit. The debt was guaranteed by its owner Alan H. Catalan, the court said.

After Addison Dane defaulted, Vision West sued the company and Catalan in state court for breach of contract. After defendants failed to deliver responses to interrogatories and promised documents, the court sanctioned them by entering default judgment in 2017, the court said.

Catalan responded by filing Chapter 7 in May 2017.

Vision West sued Catalan in bankruptcy court for a judgment that its debt would not be discharged, on the theory that it was caused by willful and malicious acts of Catalan.

The attorneys fees incurred by Vision Quest directly connected to Catalan’s failures to comply with discovery orders were the result of his willful and malicious conduct and will be excluded from discharge, the court said.

However, to the extent that the judgment was for Catalan’s breach of contract, that debt is dischargeable. Catalan’s conduct doesn’t change the character of that debt, the court said.

Catalan represented himself. Vision West was represented by Thomas E. Reilly, Sewickley, Pa.

The case is Vision West, Inc. v. Catalan (In re Catalan), 2018 BL 327330, Bankr. E.D. Pa., Bky. No. 17-13225; Adv. No. 17-0210, 9/11/18.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com