Lamar, Archer & Cofrin, LLP v. Appling (In re Appling)

• Decision Date: 10 March 2015
• Docket Number: Case No. 13–30083–JPS,Adversary Proceeding No. 13–3042
• Citation: 527 B.R. 545
• Court: U.S. Bankruptcy Court — Middle District of Georgia
• Parties: In the Matter of: R. Scott Appling, Connie F. Appling, Debtors Lamar, Archer & Cofrin, LLP, Plaintiff v. R. Scott Appling, Defendant

527 B.R. 545

In the Matter of: R. Scott Appling, Connie F. Appling, Debtors

Lamar, Archer & Cofrin, LLP, Plaintiff

v.R. Scott Appling, Defendant

Case No. 13–30083–JPS

Adversary Proceeding No. 13–3042

United States Bankruptcy Court, M.D. Georgia, Athens Division.

Signed March 10, 2015

Bruce B. Weddell, Burbage & Weddell, L.L.C., 100 Colony Square, Suite 1825, Atlanta, Georgia 30361, David W. Davenport, Lamar Archer & Cofrin LLP, 50 Hurt Plaza, Suite 900, Atlanta, GA 30303, for Plaintiff.

Daniel L. Wilder, Emmett L. Goodman, Jr. LLC, 544 Mulberry Street, Suite 800, Macon, Georgia 31201, for Defendant.

MEMORANDUM OPINION

James P. Smith, Chief United States Bankruptcy Judge

This is an adversary proceeding in which Plaintiff seeks to have its claim against Debtor R. Scott Appling¹ determined nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). As originally pled in its complaint, Plaintiff contended that when Debtor promised to use an anticipated tax refund to pay legal fees owed to Plaintiff, he committed fraud because he, in fact, never intended to do so. However, at trial, Plaintiff amended its contentions to allege that Debtor lied about when an amended tax return had been prepared and the amount of the refund, and then subsequently lied about not having received it.²

The matter was tried on September 18 and 23, 2014. At the conclusion of the trial, the Court requested that the parties submit their closing arguments in writing. By consent of the parties, the written arguments were delayed until a transcript of the trial was obtained. The transcript has now been prepared and filed and the final brief was filed in the case on January 21, 2015. Having considered the testimony and exhibits introduced at trial, the arguments of counsel and the law, the Court now publishes its findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

FACTS

In 2002, Debtor was a mortgage loan originator who earned $270,922. In July 2003, he began working for a bank earning $3,000 per month. In June 2004, Debtor purchased a business and quit his bank job. He soon discovered his new company had serious financial problems the prior owners had allegedly failed to disclose. With a large debt payment to the sellers approaching, Debtor decided to seek legal advice.

In July 2004, Debtor retained Plaintiff law firm to represent him and his company in an attempt to rescind the purchase of the company from its prior owners on the grounds that the financial condition of the company had been misrepresented. Debtor agreed to pay Plaintiff on an hourly basis, with invoices for fees and costs to be paid monthly. Walter Gordon, a sole practitioner in Hartwell, Georgia, was retained as local counsel on a similar fee basis. Thereafter, litigation against the prior owners and other defendants ensued in the Superior Court of Franklin County, Georgia.

By March 2005, Debtor had run up a sizeable unpaid amount of fees and costs to both Plaintiff and Mr. Gordon. Debtor owed Plaintiff approximately $60,800 and Mr. Gordon approximately $18,000. A conference was scheduled in Mr. Gordon's office in Hartwell, Georgia, to discuss the status and prospects of the litigation and how the fees could be brought current. Prior to the meeting, Debtor sent an email to David Davenport, a partner at Plaintiff law firm who was handling Debtor's case, complaining about the fees and costs being incurred in the litigation, the lack of progress in the litigation and concluding with a derogatory joke about lawyers. Robert Lamar, a partner at Plaintiff law firm who was in charge of Debtor's account at the firm, responded by letter in which Mr. Lamar gave his analysis of the status of the litigation, his response to the complaints about the fees and costs and advised Debtor that if the fees and costs were not brought current, the firm would withdraw from representation and place an attorney's lien on all work product until the fees and costs were paid.³

The meeting occurred on March 18, 2005. At the meeting, Plaintiff contends that Debtor represented that his accountant had prepared an amended tax return and that he would receive a tax refund of approximately $100,000, which would be enough to pay current and future fees. Plaintiff asserts that, in reliance on these representations, Plaintiff continued to represent Debtor and did not begin collection of its fees.

The litigation was thereafter settled in stages, with settlements with each of the defendants occurring at different times. The settlements reduced Debtor's remaining financial obligations to the defendants. All matters relating to the litigation and settlement were concluded by March 2006.

On June 15, 2005, Debtor and his wife signed an amended tax return for the 2002 tax year for the refund in question. However, rather than a refund of approximately $100,000, the amended return sought a refund of only $60,718. This amount was further reduced by the IRS in October 2005 to $59,851.⁴ The evidence establishes that Debtor received a check for this amount prior to November 2005. Debtor did not pay any of the refund to Plaintiff or Mr. Gordon.

Plaintiff and Debtor had another meeting on November 2, 2005, to discuss the outstanding fees and the firm's willingness to continue with the representation, as well as filing a new law suit against a party involved in Debtor's purchase of the business who had not been sued in the original litigation. Plaintiff alleges that Debtor again made representations regarding the tax refund and, in reliance thereon, Plaintiff agreed to complete the pending litigation and forego immediate collection of the fees. However, Plaintiff refused to undertake any additional representation.

Ultimately, in June 2006, Plaintiff and Mr. Gordon allegedly learned Debtor had received and spent the refund in his business and would not use the refund to pay their fees. Plaintiff filed suit against Debtor for the unpaid fees and costs and received a judgment in October 2012 in the Superior Court of Hart County, Georgia for $104,179.60. Debtor and his wife filed Chapter 7 bankruptcy in January 2013.

Plaintiff asserts that Debtor made misrepresentations about the tax refund at both the March and November 2005 meetings. Plaintiff contends that it justifiably relied on these representations and continued to represent Debtor and forego collection of its fees. Accordingly, Plaintiff contends its claim of $104,179.60, evidenced by the judgment from the Superior Court of Hart County, Georgia, is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).

DISCUSSION

Plaintiff has the burden of proving by a preponderance of the evidence that the claim is nondischargeable. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). If Plaintiff fails to prove any of the elements of the claim:

...the debt is dischargeable. Moreover, courts generally construe the statutory exceptions to discharge in bankruptcy “liberally in favor of the debtor,” and recognize that “ ‘[t]he reasons for denying a discharge ... must be real and substantial, not merely technical and conjectural.’ ” In re Tully, 818 F.2d 106, 110 (1st Cir.1987) (quoting Dilworth v. Boothe, 69 F.2d 621, 624 (5th Cir.1934) ); see also, Boyle v. Abilene Lumber, Inc., (Matter of Boyle), 819 F.2d 583, 588 (5th Cir.1987). This narrow construction insures that the “honest but unfortunate debtor” is afforded a fresh start. Birmingham Trust Nat'l Bank v. Case, 755 F.2d 1474, 1477 (11th Cir.1985)...

Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir.1994).

11 U.S.C. § 523(a)(2)(A) bars in relevant part, the discharge of debts for services or an extension or renewal of credit resulting from “false pretenses, a false representation, or actual fraud....”

The elements of a claim under § 523(a)(2)(A) are: the debtor made a false statement with the purpose and intention of deceiving the creditor; the creditor relied on such false statement; the creditor's reliance on this false statement was justifiably founded; and the creditor sustained damage as a result of the false statement.

Johannessen v. Johannessen, 76 F.3d 347, 350 (11th Cir.1996).

A fraudulently induced forbearance from collection constitutes an extension of credit for purposes of 11 U.S.C. § 523(a)(2)(A). Ojeda v. Goldberg, 599 F.3d 712, 718 (10th Cir.2010) ; Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 132–33 (4th Cir.1999) ; Wolf v. Campbell (In re Campbell), 159 F.3d 963, 966 (6th Cir.1998) ; Field v. Mans, 157 F.3d 35, 43 (1st Cir. 1998). Further:

‘As distinguished from false representation, which is an express misrepresentation[,] false pretense involves an implied misrepresentation or conduct intended to create and foster a false impression,’ Minority Equity Capital Corp. v. Weinstein (In re Weinstein ) , 31 B.R. 804, 809 (Bankr.E.D.N.Y.1983), and ‘[i]t is well recognized that silence, or the concealment of a material fact, can be the basis of a false impression which creates a misrepresentation actionable under § 523(a)(2)(A),’ id. ; see also, e.g., Citizens & S. Nat'l Bank v. Thomas (In re Thomas), 12 B.R. 765, 768 (Bankr.N.D.Ga.1981) (‘A debtor's silence may amount to a materially false representation prohibiting discharge of the indebtedness.’).

SunTrust Bank v. Brandon (In re Brandon), 297 B.R. 308, 313 (Bankr.S.D.Ga.2002).

Because direct proof of intent (i.e., the debtor's state of mind) is nearly impossible to obtain, the creditor may present evidence of the surrounding circumstances from which intent may be inferred.

Caspers v. Van Home (Matter of Home ) , 823 F.2d 1285, 1287 (8th Cir.1987), abrogated on other grounds by Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

False Statement Made With Intention To Deceive

The March 18, 2005 Meeting

By letter dated March 9, 2005, Mr. Lamar advised Debtor that unless the fees owed to Plaintiff and Mr. Gordon were brought current promptly, the firms would withdraw from the representation and place an attorney's lien on...