WASHINGTON (CN) - The government and private lawyers argued before the Supreme Court Monday over who has dibs on a debtor's attorney's fees, after the government paid her legal fees by erasing the debt she had with the government, leaving the lawyer with nothing.
Debate turned on whether the winning "party" refers to the client or the lawyer.
If the money is for the client, the government has a right under the 2005 Debt Collection Improvement Act to offset the client's payments with debt reduction.
But if the attorney's fees are for the lawyer, erasing the client's debt would not fulfill the lawyer's entitlement to the funds.
Representing the government, Assistant Solicitor General Anthony Yang argued that the fees must be directed to the client and that the lawyer must then turn to the client for payment, noting that the Internal Revenue Service taxes the awarded fees as the client's income.
Yang said Congress intended attorney's fees to be offset by debt reductions, because it didn't exempt such fees from the 2005 debt act.
But Justice Stephen Breyer compared the client to a trust fund, suggesting that the money is ultimately directed to the lawyer. "The trust is not a person entitled to the benefit of the payment," he said. "The beneficiaries of the trust are entitled to the benefit of the payment."
Breyer appeared concerned that should the government's arguments prevail, a client owing money to the government would not be able to find a lawyer, because the lawyer might not be paid even if the client has a good case and is awarded fees.
When Breyer asked whether something could be worked out so the client gets representation, Yang responded that the client, the lawyer and the government could agree that if attorney's fees are awarded, the client would take up a repayment plan with the government, and the government would not seize the attorney's fees.
Justices Sonia Sotomayor and Anthony Kennedy appeared skeptical.
"Could you tell me what would motivate the government to agree to give to a lawyer a piece of a recovery that it, the government, thinks it's entitled to?" Sotomayor asked, adding that it would be "illogical" for the lawyer to do the government's work in negotiating a debt-paying agreement completely unrelated to the case.
James Leach represented Catherine Ratliff, the lawyer who was never paid. He argued that the winning party includes the lawyer, and that the lawyer is the intended beneficiary of the fees even though the check may be sent to the client.
"Attorney's fees go to the attorneys," he said.
Justice Samuel Alito and Justice Antonin Scalia asked how the government would have the authority to give the lawyer priority over other creditors. "What gives the federal government the right to override state law on that issue?" Alito asked Young, who eagerly replied that the government doesn't have the authority under the Equal Access to Justice Act.
Alito agreed with the government that the payment is made to the client. "If it's to be made to the claimant, then it's not for the beneficial interest of the attorney," he said.
Scalia also suggested that the fee award is for the benefit of the client instead of the attorney. "Isn't it the plaintiff that is entitled to the benefit, because this money is given to him in order that he can meet a financial obligation that he owes to the lawyer?" he asked.
Even Justice Ruth Bader Ginsburg joined in to question the lawyer's entitlement to fees. "One of the difficulties with your position is that Congress did exempt a number of federal payments from the offset, but it didn't exempt Equal Access to Justice fees."
Kennedy, who often casts the deciding vote, remarked, "It seems to me the underlying assumption of some of the questions that have been put to you by the Court is that the government has somehow benefited because the money is created to offset the debt. It really isn't," he said. "The government would be better off if there were no suit at all."
But Chief Justice John Roberts, noting that a legal fee award meant the government did something wrong, seemed to rebut Kennedy's apparent sympathy for the government.
The government paid the attorney's fees directly to the lawyers until 2005, when the debt act was fully implemented and the government began to offset the fees with debt reduction.
Ratliff sued after representing Ruby Willow Kills Ree against the government. Ree won the right to two months of additional Social Security benefits and was awarded roughly $2,100 in attorney's fees, but the government applied the money to pay down the debt Ree owed the government, and Ratliff was never paid.
The district court ruled that Ratliff did not have standing against the government, deciding that attorney's fees are awarded to the client, and because the client was compensated in debt relief, the lawyer must independently go after her client for payment.
The 8th Circuit reversed, ruling that attorney's fees are awarded directly to the lawyers and thus can't be absorbed by other creditors.
If the justices rule for the government, "fewer clients who owe debts to the government and also need representation to secure Social Security benefits will be represented," Mary D'Isa from the Thomas M. Cooley Law School wrote in a review distributed by the court.
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