In re Janikowski
| Decision Date | 21 May 1986 |
| Docket Number | Adv. No. 84 A 391.,Bankruptcy No. 83 B 17760 |
| Citation | 60 BR 784 |
| Parties | In re Waclaw R. JANIKOWSKI and Deborah J. Kottel, Debtors. Loretta PURCELL and Richard Ryan, Plaintiffs, v. Waclaw R. JANIKOWSKI and Deborah J. Kottel, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Stephen B. Diamond, Margaret M. Fahrenbach, Beeler, Schad & Diamond, Chicago, Ill., for plaintiffs.
Howard L. Adelman, Adelman & Gettlemen, Ltd., Chicago, Ill., for defendants.
This matter came before the court on the debtors' Motion to Dismiss the Complaint to Determine Dischargeability filed by Loretta Purcell and Richard Ryan. For the reasons stated below, the Motion to Dismiss the case is denied, but the Complaint is stricken and plaintiff given time and leave to cure the pleading deficiencies described hereinbelow.
Waclaw Richard Janikowski and Deborah Jean Kottel ("debtors") filed their joint petition as co-partners in the practice of law, under Chapter 7 of the Bankruptcy Code. Loretta Purcell and Richard Ryan filed this Adversary Complaint to bar dischargeability and for award of damages. The Complaint seeks to have the asserted debt declared non-dischargeable due to the debtors' alleged improper handling of a real estate transaction while secretly representing the other party to that transaction. Debtors moved to dismiss the suit and Complaint for failure to state a claim upon which relief can be granted under Bankr. Rule 7012 and Rule 12 F.R.Civ.P. and for failure to plead fraud with specificity as required by Rule 9(b) F.R.Civ.P.
When ruling on a Motion to Dismiss, the Court accepts all well pleaded allegations of the Complaint as true and reads them in the light most favorable to the plaintiff. Securities Fund v. American National Bank, 542 F.Supp. 323 (N.D.Ill.1982). The motion should be granted only when it appears that a plaintiff can prove no set of facts which would warrant relief. Zapp v. United Transportation Union, 727 F.2d 617 (7th Cir.1984). Pleading standards under Rule 9(b) F.R.Civ.P. are separately discussed below.
The Complaint alleges the following facts and events, taking all well pleaded allegations as true and reading them in a light most favorable to plaintiff:
Kottel is an attorney licensed to practice in the state of Illinois. She began representing the plaintiffs Purcell and Ryan in various legal matters during January of 1981. Kottel's representation of plaintiffs continued through the formation and dissolution of the Kottel, Janikowski and Light law office partnership ("KJL") and then through its successor partnership, Kottel and Janikowski.
In December of 1981, Kottel told Purcell she had a buyer for property which plaintiffs co-owned located at 2333-37 and 2342 W. North Avenue in Chicago ("North Avenue Property"). The North Avenue Property was not listed for sale at the time. A few days later, Purcell was in the KJL office on an unrelated matter. Kottel said that she had a buyer for the North Avenue Property who could profitably manage multi-family apartment buildings and would be able to make timely payments should plaintiffs decide to sell that property.
Later, Kottel called Purcell and said that the prospective buyer offered to purchase the North Avenue Property for $110,000. Purcell and Ryan extended a counteroffer of $125,000 through Kottel. Kottel later told plaintiffs that the buyer had countered with an offer of $120,000. In purported reliance on Kottel's representation that the buyer could make timely payments, Purcell and Ryan agreed to sell the North Avenue Property for the latter price.
Kottel instructed plaintiffs to enter into a real estate listing contract with ReMax Properties which provided that the broker would receive a 7% commission on the sale. Believing that the buyer had contacted Kottel through ReMax Properties, the plaintiffs signed the listing agreement for the sale of the North Avenue Property.
On January 15, 1982, Purcell and Ryan executed a written contract to sell the Property to Donald G. Trosper ("Trosper") for $120,000, pursuant to an Installment Agreement for Deed. Kottel prepared that Installment Agreement and submitted it to Purcell and Ryan for signature. The document provided that plaintiffs would retain title to the North Avenue Property until Trosper paid the purchase price in full.
On January 23, 1982 when plaintiffs arrived at the KJL office to close the sale they were introduced to Trosper and his counsel. It is alleged "upon information and belief" that defendants' law partner represented purchaser at that closing. Kottel advised plaintiffs that rather than sell the Property on the Installment Agreement as they had planned, the plaintiffs should execute a Warranty Deed to Trosper in exchange for a $75,000 Wraparound Installment Note ("Wraparound Note") and a $35,660.13 Junior Note to be secured, respectively by a Wraparound Trust Deed and a Junior Trust Deed.
Kottel recommended that the Wraparound Deed of Trust be recorded only against the North Avenue Property and that the Junior Trust Deed be recorded against the "Melrose Arms Property", property which Trosper anticipated purchasing by February 22, 1982. If Trosper did not acquire the Melrose Arms Property by that date, the Junior Deed of Trust would be recorded against the North Avenue Property or any other property agreed upon by the parties. Kottel said this would provide the plaintiffs greater protection because the debt would be secured by two separate properties and not by the North Avenue Property alone.
In reliance upon Kottel's representations and advice, Purcell and Ryan executed and delivered the Warranty Deed and accepted the notes which were to be secured by the two Trust Deeds and recorded as described above. They were not advised by Kottel to delay the closing on the North Avenue Property or to close in escrow until the Melrose Arms Property was purchased by Trosper. Kottel was entrusted at closing and afterwards with all documents received on behalf of plaintiffs.
Kottel failed to record the Wraparound Trust Deed and Junior Trust Deed prior to the execution and recording of the Warranty Deed. Kottel also failed to order a title commitment once the trust deeds were recorded to ensure that plaintiffs as mortgagees were fully secured in the chain of title on both pieces of property before the Warranty Deed was recorded. Additionally, Kottel failed to arrange for title insurance or to disclose to the plaintiffs that they should obtain such insurance to protect their interests in the Property.
Kottel did not record the Junior Trust Deed until June 3, 1982, and then she recorded it against both the North Avenue and Melrose Arms properties. By that time, other creditors had obtained priority over plaintiffs' Junior Trust Deed on both properties rendering the Junior Trust Deed worthless against either property.
Trosper recorded a Deed of Trust against the North Avenue Property on March 16, 1982. This further encumbered the Property which was intended to secure the plaintiffs under the Junior Trust Deed. Had the latter Deed been recorded on February 22, 1982 as provided in the sales transaction, it would have had priority over the March 16, 1982 Deed of Trust.
Between March 16, 1982 and March 31, 1982 a trust deed and four junior mortgages totalling $344,632 were recorded against the Melrose Arms Property, the other property intended to secure plaintiffs under the Junior Deed of Trust. When that Deed was finally recorded against the Melrose Arms Property on June 3, 1982, Trosper did not even appear in the chain of title.
Trosper failed to make any payments on either note, and he filed bankruptcy in May, 1983. During the period from March of 1982 through December of 1982 when Trosper was in default on the notes, plaintiffs and Ryan asked Kottel for legal advice to remedy Trosper's defaults. Based on Kottel's assurances that Trosper would fully pay each note when the final payments became due, Purcell and Ryan did not foreclose on the Property or pursue other remedies.
Throughout this entire period Kottel did not disclose to plaintiffs that she had represented Trosper on a continuing basis, and also in many real estate transactions prior to January, 1982.
Plaintiffs contend that debtors Kottel and Janikowski, individually and as a partnership, acted fraudulently and breached their fiduciary duty to Purcell and Ryan. These contentions are based on the debtors' alleged advice to the plaintiffs to sell by Warranty Deed rather than by installment sale; the debtors' failure to record the Junior Trust Deed until after Trosper had over-encumbered the North Avenue Property; and most significantly, the debtors' failure to disclose their prior and on-going legal representation of Trosper. Plaintiffs further assert that Kottel induced them not to foreclose after Trosper had defaulted. They contend that as a result of debtors' misrepresentations and omissions, they transferred title to their property and accepted a Junior Trust Deed from Trosper on both the Melrose Arms Property (in which Trosper did not have title) and the North Avenue Property (which became worthless when late recording followed intervening encumbrances). The asserted wrongdoing by Kottel is alleged to be direct. That of Janikowski is only vaguely pleaded and appears to be based on a view that he is vicariously liable for Kottel's acts because he was her partner, and/or because he ratified and supported her acts in some as yet unspecified way.
The Complaint prays that Kottel and Janikowski be held personally liable for $110,600.13 plus interest thereon allegedly lost by plaintiffs. It also seeks to have that debt held nondischargeable under 11 U.S.C. § 523(a)(4). Plaintiffs seek the latter relief because Kottel and Janikowski allegedly committed deceptions and fraud...
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