In Re Janice Smith-canfield, 08-61630-fra13

Decision Date02 March 2011
Docket NumberNo. 09-6327-fra,No. 08-61630-fra13,08-61630-fra13,09-6327-fra
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Oregon

The case came on for trial in Medford, Oregon on December 13, 2010.


Defendant is an attorney, practicing in Klamath Falls, Oregon for 27 years. His practice includes preparing bankruptcy petitions for debtors, and real estate transactions. He was, as we shall see, also a real estate broker. Plaintiff is a businesswoman residing in Klamath Falls, and is the Debtor in the underlying Bankruptcy case. This adversary proceeding arises out of the parties' professional relationship.

On or about March 3, 2008, Plaintiff consulted with Defendant respecting relief under the Bankruptcy Code. At that time she had recently moved to Oregon from North Carolina. Before living in North Carolina she lived with her then-husband in Tennessee. Before the move to Oregon, Plaintiff was divorced from her husband and had sold the Tennessee marital residence. She found employment in Klamath Falls as comptroller of an automobile dealership. Her earnings there were approximately $8,000 a month.

At the time of her initial consultation, Plaintiff was living in an apartment. Defendant advised Plaintiff that she should buy a residence in order to take advantage of any available homestead exemption, and in order to reduce the amount of her income considered "disposable" under the Bankruptcy Code, and thus payable to creditors in any Chapter 13 plan.

It is not clear whether the parties discussed the homestead issue in any detail. Defendant testified that he stated that her "equity" would be exempt if she owned a home, but there was no exploration as to whether Plaintiff qualified for the Oregon homestead exemption.2 Defendant testified that the most important benefit of acquiring a home pre-petition was the effect on the minimum payment she would have to make under a chapter 13 plan. He reasoned that the increased monthly expense of owning a home and making mortgage payments would be deducted from Plaintiff's income for the purpose of calculating the disposable income payable to creditors over the course of a Chapter 13 plan. Defendant testified that the savings-that is, reduced payments to creditors-amounted to $72,000 over the life of the plan.3

Having advised that buying a home was sound pre-bankruptcy planning, Defendant told Plaintiff he could further assist in the effort because he was a real estate broker. He quickly located a property on James Martin Ct. in Klamath Falls (the property), and arranged for financing. Plaintiff did not know at the time that shortly beforehand Defendant had been approached by a Mr. William Wohrman, who sought advice on foreclosing his trust deed on the property, then owned by a Mr. Shan Ferrier.

The parties inspected the property and observed some problems with the landscaping at the rear thereof. In particular, a cement block retaining wall had collapsed. Nevertheless, it was decided to go forward with the purchase. Financing-certainly problematic in light of Plaintiff's financial condition-was to be provided by Mr. Wohrman who had been contacted for that purpose by Defendant.

The contract of sale was prepared by Defendant, who used a form of Earnest Money and Sale Agreement commonly employed by real estate professionals. He included a provision that the seller, Mr. Ferrier, would rebuild the retaining wall. Despite his knowledge that Mr. Ferrier was himself in financial trouble, no provision was included to secure performance (such as a holdback of part of the purchase price). Defendant also included in the sales contract a provision which waived the right to have any inspections performed as a contingency to closing.

At this point the parties had different views of their relationship. Plaintiff insists that at all times and in all respects, Defendant was acting as her attorney. Defendant's view is that he was acting as an attorney only with respect to the bankruptcy petition (and, presumably, the prebankruptcy planning). He maintains his participation in the property's purchase was as a real estate licensee not an attorney.

Before the sale closed, Plaintiff and Defendant again inspected the property. It appeared to both of them that the retaining wall had been rebuilt. Believing that the repair condition had been satisfied, Plaintiff proceeded to close the sale on April 18, 2008. In doing so she acknowledged that all of her contingencies and conditions had been met. The purchase price was $225,000. Defendant was paid a commission of $5,625.4

Mr. Wohrman's family trust provided the financing. In accord therewith, Plaintiff executed a $200,000 promissory note5 and gave a trust deed on the property to secure her performance.

Plaintiff's Chapter 13 bankruptcy petition was filed on May 16, 2008. Her Chapter 13 plan was confirmed without objection. Plan confirmation re-vested all of the property of the estate in Plaintiff.6 The plan provided for and the confirmation order allowed Defendant's attorney's fees for the entire case in the sum of $4,000 of which $1,000 had been paid by Defendant in early April. The $3,000 balance was paid over the early term of the plan out of the monthly payments Plaintiff made to the Chapter 13 Trustee.

By letter dated May 23, 2008, Plaintiff received notice from the City of Klamath Falls that the retaining wall was deficient. Specifically, the wall did not conform with the Klamath Falls Community Development Ordinances.7 The notice required that a new wall be "engineered" and rebuilt at considerable expense. Unbeknownst to Plaintiff (and, it appears, Defendant) the same notice had been delivered to the seller, Mr. Ferrier before the sale closed. Plaintiff now faces fines of up to $100 a month until the wall is rebuilt.

a) Core v. Non-Core:

Plaintiff brings claims for disgorgement of Defendant's attorney's fees and broker's commission under 11 U.S.C. § 329(b), 8 attorney and real estate broker malpractice, and attorney and broker breach of fiduciary duty. A threshold issue raised by the parties is whether I can enter a final judgment on the claims. The answer turns on whether the claims are "core" proceedings. If so I may enter a final judgment. If not, and the matters are only "related to" the bankruptcy case, because Defendant has objected to a final determination ofthe malpractice and fiduciary duty claims, as to those claims I must enter proposed findings of fact and conclusions of law for the District Court's denovo review. 28 U.S.C. § 157(c)(1) & (2).

"Core" matters are those "arising under" Title 11 or "arising in" a case under Title 11. 28 U.S.C. § 157(b)(1). A non-exhaustive list of "core" proceedings is set out in 28 U.S.C. § 157(b)(2)(A)-(P). A matter may be "core" even if state law affects the outcome. 28 U.S.C. § 157(b)(3). "A matter 'arises under' the Bankruptcy Code if its existence depends on a substantive provision of bankruptcy law, that is, if it involves a cause of action created or determined by a statutory provision of the Bankruptcy Code." Battle Ground Plaza, LLC v. Ray et. al. (In re Ray), 624 F.3d 1124, 1131 (9th Cir. 2010). Here there is no dispute Plaintiff's claim for disgorgement under § 329(b)9 is a claim "arising under" Title 11, and thus I may enter a final judgment thereon.

The claims for attorney and broker malpractice and breach of fiduciary duty are a closer call. Those do not implicate a statutory provision of Title 11 and thus are not "arising under" matters. Thus to be "core" they must be "arising in" matters. In Ray, supra, the Ninth Circuit Court of Appeals stated as follows:

A proceeding 'arises in' a case under the Bankruptcy Code if it is an administrative matter unique to the bankruptcy process that has no independent existence outside of bankruptcy and could not be brought in another forum, but whose cause of action is not expressly rooted in the Bankruptcy Code.

Id. Despite the "could not be brought in another forum" language, the Ray court in citing with approval its earlier opinion, Harris v. Whitman (In re Harris), 590 F.3d 730, 737 (9th Cir. 2010), cert. den., 130 S.Ct. 3413 (2010) made clear that the sine qua non of "arising in" jurisdiction is whether the cause of action would have no existence outside of a bankruptcy case, not whether another forum could entertain it. Id. at 1133.10

Here, Defendant's advice to buy the property and consequent facilitation of the sale was in contemplation of Plaintiff filing bankruptcy. Whether claims for professional malpractice and breach of fiduciary duty against a debtor's attorney based on pre-petition acts associated with the bankruptcy case are "core" appears to be a matter of first impression in this District and Circuit. Other courts are split on the issue. Compare, Helbling v. Josselson (In re Almasri), 378 B.R. 550 (Bankr. N.D. Oh. 2007) (claim brought by Chapter 7 trustee against debtor's bankruptcy counsel for pre-petition acts involving preparation of debtor's schedules was non-core), with, Kaiser Group Holdings, Inc. v. Squire Sanders & Dempsey LLP (In re Kaiser Group Int'l, Inc.) 421 B.R. 1 (Bankr. D. Dist. Col. 2009) (prepetition advice to Chapter 11 debtoraddressing impending bankruptcy matters was core); Simmons v. Johnson, Curney & Fields, P.C. (In re Simmons), 205 B.R. 834 (Bankr. W.D. Tx. 1997) (same).

I concur with the Kaiser and Simmons courts. As noted in Kaiser, "[p]re-petition advice, when addressing the impending bankruptcy, falls within 'arising in' jurisdiction because it is inseparable from the bankruptcy and would not occur but for it." Kaiser, supra at 10. The Simmons court noted the importance of § 329 in its analysis. Simmons, supra at 841, n.4. That section protects a debtor from attorney overreaching, In re Addison, 2008 WL 1902429, *4 (Bankr. D. Or. 2008), and allows the court to examine...

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