In re Ducey
| Citation | 160 BR 465 |
| Decision Date | 29 September 1993 |
| Docket Number | Bankruptcy No. 92-1418,Adv. No. 92-1118. |
| Parties | In re Donald DUCEY, Joanna Ducey, Debtors. Donald DUCEY, Joanna Ducey, Plaintiffs, v. Brian DOHERTY, Defendant. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of New Hampshire |
Victor Dahar, Manchester, NH, for plaintiffs.
Robert G. Tetler, Hampton, NH, for defendant.
Steven Darr, c/o Ernst & Young, Boston, MA, Trustee.
The above-captioned proceeding was tried before the Court on July 23, 1993 on a complaint brought pursuant to 11 U.S.C. § 523(a)(4) to determine that a $10,000 "debt" resulting from a court-ordered disgorgement of a retainer fee is nondischargeable. The Court has jurisdiction of this proceeding pursuant to 28 U.S.C. § 1334(a). This proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The following constitutes the Court's findings of fact and conclusions of law in accordance with Fed.R.Bankr.P. 7052.
On or about March 1, 1991 the plaintiffs filed for bankruptcy protection under Chapter 11. Their petition was prepared and filed by the defendant. As part of the petition for relief, the defendant disclosed pursuant to § 329 and Rule 2016(b) that he had received a pre-filing payment of $10,000 plus an additional $500 as the expense for filing the chapter 11 petition. Further, in a standard boiler-plate reference to the possibility of additional fees, the 2016(b) disclosure statement said that in addition to the $10,000 retainer, the plaintiffs had agreed to pay: "additional compensation as allowed by the Court pursuant to applications for payment of professional fees."
At some point it came to pass that not only was the plaintiffs' chapter 11 proceeding off track, but in fact their attorney, the defendant, had filed for bankruptcy relief himself on May 4, 1992. Prior to the defendant's petition, the Court had issued an order to show cause on October 11, 1991 in the plaintiffs' chapter 11 proceeding as to why the defendant should not be compelled to disgorge the $10,000 retainer. By Order entered October 31, 1991 the Court ordered the defendant to turn over the $10,000 retainer to the estate to be held by the plaintiffs as debtors-in-possession for the purpose of retaining new counsel to complete their reorganization. It was the Court's intention then, as now, that the money turned over be used to provide a retainer for a new attorney to shepherd the plaintiffs' bankruptcy to completion. In that same October 31, 1991 Order, the Court required the United States Trustee to file a report and recommendations as to the time and manner in which the defendant would repay the $10,000 retainer.
Then, on November 15, 1991, after receipt of the United States Trustee's report, the Court approved the same and overruled the defendant's objection. The November 15, 1991 Order was a final order and directed the defendant to turn over $10,000 to the plaintiffs' subsequent counsel within seven days. The defendant failed to pay over the $10,000 within seven days and appealed the November 15, 1991 Order as well as this Court's denial of his motion for stay pending appeal. On August 3, 1992 Senior District Court Judge Martin F. Loughlin dismissed the defendant's appeal.
In his own bankruptcy petition, at Schedule F, "Creditors Holding Unsecured Nonpriority Claims," the defendant listed the plaintiffs. In the schedule, the defendant listed the amount of the claim as $10,000, that it was incurred on October 15, 1991 for the provision of legal services, and that it was disputed and unliquidated. In addition to the above, the defendant claimed a setoff right of $2,552.89. Then on August 11, 1992 the plaintiffs filed the complaint which is the subject of this adversary proceeding. That complaint claimed the debt owing to the plaintiffs resulting from this Court's disgorgement order was nondischargeable under § 523(a)(2)(A) or 523(a)(4). At a continued pretrial hearing held on March 23, 1993 the Court heard argument on the defendant's motion to dismiss. After hearing, the Court granted the defendant's motion to dismiss the 523(a)(2)(A) ground and trial was limited to the 523(a)(4) count only. Trial was held on July 23, 1993 and the matter was taken under advisement at that time.
The sorry story of this sordid affair really came to a head at the hearing held on October 11, 1991 on the Court's Order to Show Cause to disgorge the $10,000 retainer. At that October 11, 1991 hearing the Court granted the defendant's motion to withdraw as counsel for the plaintiffs. At the same time, the defendant asked for attorney's fees nunc pro tunc. At that hearing the United States Trustee raised her objection as to the allowance of any attorney's fees, much less nunc pro tunc. She also raised the fact that the defendant had taken additional sums post-petition from third parties without disclosing the compensation to the Court. See Transcript of hearing on Motion to Withdraw as Attorney for the Debtors; Continued status of stipulation orders for adequate protection; and Order to Show Cause to Disgorge portion or all fees of the attorney for the debtors, at page 9. Plaintiffs' Exhibit No. 9.
During the Court's examination of the plaintiffs at the October 11, 1991 hearing it came to light that not only had the defendant failed to carry them through their chapter 11 proceeding to completion as he had promised when he took the $10,000 prefiling retainer, but later, when he left New Hampshire and relocated to Florida, he put the plaintiffs in contact with another lawyer in the seacoast area who demanded an additional $7,500.00 to accept their case. Plaintiffs' exhibit 9, transcript at page 17. It was the plaintiffs' direct testimony that "we got charged for letters from attorney Doherty that he was telling us that he was going to drop the case unless we gave him more money." Plaintiffs' exhibit 9, transcript at page 16, lines 4 through 6.
In response to examination by the United States Trustee at the October 11th disgorgement hearing, the plaintiffs responded that they had paid the $10,000 retainer in cash without a written fee agreement. Plaintiffs' exhibit 9, transcript at pages 27-29. It is the plaintiffs' theory that the defendant was acting in a fiduciary capacity at the time he entered into their representation and took the $10,000 retainer. See Complaint to Determine Dischargeability of Debt, ADV Doc. No. 1 at paragraph 12. In his answer, the defendant admitted that there was an attorney-client relationship, but he denied that the $10,000 retainer that was ordered refunded is a nondischargeable debt. Defendant's answer at paragraph 7. Thus, distilled to its essence, the issues this case presents the Court are (1) whether the existence of the attorney-client relationship between plaintiffs and defendant imposed a fiduciary duty upon the defendant with respect to the $10,000 retainer; and (2) whether the defendant's failure to pay over the retainer as ordered by this Court results in a nondischargeable debt arising from the defalcation by the defendant while in a fiduciary capacity as that concept has been interpreted by cases decided under 11 U.S.C. § 523(a)(4).
The defendant urges this Court to apply the reasoning of the Arizona appellate court in Kadish v. Phoenix-Scotts Sports Company, 11 Ariz.App. 575, 466 P.2d 794 (1968), which states that acts amounting to misconduct reflecting bad faith, not merely inadvertence, mistake or negligence, are required to support a claim that there was a defalcation of some fiduciary duty. In a previously filed motion to dismiss, ADV Doc. No. 5, the debtors have admitted that:
"In the instant matter, the debtor\'s conduct constituted at worst, inadvertence, mistake or negligence in not realizing that an application to employ himself as a legal counsel to the plaintiffs needed to be filed and approved, before he was entitled to legal fees."
Defendant's motion to dismiss, ADV Doc. No. 5, at page 3. However, the Court notes that Kadish actually held that the defendant's discharge in bankruptcy did not bar a charge of fiduciary defalcation where the claim was for unauthorized expenditure of corporate funds for non-corporate purposes. Id. 11 Ariz.App. at 579, 466 P.2d at 798. It therefore appears to the Court that the defendant's reliance on Kadish is misplaced.
From the plaintiffs' point of view, there existed a relationship between the defendant and the plaintiffs under which the plaintiffs' relied on the defendant's judgment and advice. What is less clear is whether this is technically a "fiduciary" relationship under the statute and how it was created. Here the plaintiffs have several theories. All of the theories are an attempt to overcome this Court's decision of In re Reeves, 124 B.R. 5 (Bankr.D.N.H.1990), in which I interpreted section 523(a)(4) to be limited to express trust arrangements. This reading of § 523(a)(4) left out an entire swath of fiduciary-like relationships imposed by statute or by common law.
Plaintiffs urge the Court to adopt the Third Circuit's decision in Goldberg v. New Jersey Lawyers' Fund for Client Protection, 932 F.2d 273 (3d Cir.1991), in which the Third Circuit found that client funds used for the purposes of representation fit within the narrow definition of fiduciary as contemplated by the Code and as interpreted by the Reeves decision. In fact the plaintiffs cite the Reeves decision for the proposition that a fiduciary relationship was formed when the defendant took possession of the $10,000 retainer when he undertook their legal representation.
Plaintiffs then go on to allege that there was a fiduciary relationship created by virtue of the defendant's position as a member of the Bar of the State of New Hampshire. According to the plaintiffs, the defendant's standing as a member of the Bar of the State of New Hampshire required him to abide by the Rules of Professional Conduct which they believe cast him in a...
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