In re Kroen

• Decision Date: 18 July 2002
• Docket Number: Bankruptcy No. 02-50605(MS).,Adversary No. 02-5137.
• Citation: 280 B.R. 347
• Parties: In the Matter of Mark Alan KROEN, Debtor. Marra, Gerstein & Richman, Plaintiff, v. Mark A. Kroen, Defendant.
• Court: U.S. Bankruptcy Court — District of New Jersey

280 B.R. 347

In the Matter of Mark Alan KROEN, Debtor Marra, Gerstein & Richman, Plaintiff, v. Mark A. Kroen, Defendant.

Bankruptcy No. 02-50605(MS).

Adversary No. 02-5137.

United States Bankruptcy Court, D. New Jersey.

July 18, 2002.

COPYRIGHT MATERIAL OMITTED

Sheryll S. Tahiri, Ravin Greenberg PC, Roseland, NJ, Attorneys for the Debtor/Defendant Mark Alan Kroen.

Anthony J. Marra, Marra, Gerstein & Richman, Edison, NJ, Attorneys for Plaintiff.

MORRIS STERN, Bankruptcy Judge.

The debtor in this Chapter 7 case is said to have assured his matrimonial attorney that fees accruing over the substantial period of his divorce proceeding would not be discharged by the debtor in bankruptcy. After the legal services were concluded, and the debtor filed his bankruptcy petition, the attorney initiated this adversary proceeding seeking an exception to discharge under 11 U.S.C. § 523(a)(2). The attorney claims to have been defrauded by the debtor through materially false oral representations. The plaintiff-attorney alleges in the unverified Complaint:

In order to induce the Plaintiff to render the aforementioned legal services, the Debtor represented to the Plaintiff that the Debtor would not discharge the Plaintiff's bill in Bankruptcy. Specifically, the Defendant represented to Mark J. Richman, Esq. of the Plaintiff, before and during trial and before substantial services were rendered in preparation for the trial, that the Defendant would not discharge the Plaintiff's bill in Bankruptcy.

Complaint ¶ 3.

Brought on by the debtor's motion for summary judgment, the issue before the court is whether the alleged representation that no discharge would be sought is an appropriate basis under the circumstances of this case for an exception to discharge under § 523(a)(2)(A).¹

Statement of Facts.

By retainer agreement dated August 17, 1998, the debtor and the plaintiff came to terms regarding what apparently turned out to be a protracted matrimonial case. From the retention date through services included in a statement dated November 13, 2001, the debtor was billed $43,166, paid $28,823, and owed $14,343 when he filed his Chapter 7 petition on January 16, 2002. The parties disagree on the basic fact as to whether the debtor made the representation complained of by the plaintiff. The debtor flatly denies the allegation that he said he would not seek a discharge of the attorney's fee claim in any future bankruptcy.

The debtor claims that over more than three years of the matrimonial proceeding, his financial position deteriorated and that at one point Mr. Richman of the plaintiff referred him to "another partner of the Plaintiff to discuss the possibility of filing a bankruptcy matter on my behalf.... Plaintiff offered to represent me in a bankruptcy proceeding so long as it would not affect my obligations to Plaintiff.... I did not retain Plaintiff to represent me in a bankruptcy matter." Debtor's Certification at ¶¶ 4-6. Though the plaintiff denies that an offer was made to represent the debtor in a bankruptcy proceeding, it is acknowledged that the debtor "may very well have met with [Mr. Richman's] partner to become educated and know his options regarding bankruptcy." Richman Certification at ¶ 9.

The plaintiff's submission and response to the summary judgment motion adds little to the sparse facts included in the Complaint other than to dispute basic facts as a defensive matter. As to purported reliance on the debtor's alleged statements, Mr. Richman offers the following:

During the course of the litigation the defendant was unable to meet his financial obligations to our counsel fees. In my 30 years of practice, I had never allowed a client to become so indebted in counsel fees. Yet, based on our relationship, and the defendant's representations that he would pay his bill, I continued to represent the defendant.

Richman Certification at ¶ 7 (emphasis added). The plaintiff's reference to the potential bankruptcy discharge is separated from that statement of reliance, and appears as part of the following factual rebuttal:

The defendant's certification (paragraph seven) that: `I never represented to plaintiff that I would not seek to discharge said debt in the event I decided to file for relief under the Bankruptcy Code' is an absolute falsehood. I represent to this Court that the defendant, in a number of conversations with him, indicated the exact opposite. The defendant indicated he was very pleased with my representation. The defendant assured me he would pay my bill and would not discharge our firm in bankruptcy.

Richman Certification at ¶ 8.

Discussion.

At this juncture, the court must view the facts before it most favorably to the plaintiff, in evaluating whether there is a genuine issue of material fact to be tried. Fed.R.Civ.P. 56(c), incorporated into the Bankruptcy Rules through Fed. R. Bankr.P. 7056, requires the court to grant summary judgment when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Viewing the facts in accordance with that standard, the following is clear:

1. The plaintiff initially undertook representation of the debtor in a matrimonial case without any inducement based upon a waiver of discharge of the attorney fee-related debt;

2. At some point before and perhaps during the divorce trial (which seems to have been in March, 2001), the debtor is said to have stated that he would not seek a discharge of the fees in bankruptcy;

3. The plaintiff provides neither specific dates of these oral representations nor quotes as to what exactly was said, nor whether the statements resulted from the attorney's inquiry or demand or was otherwise volunteered, nor facts that would provide more context to the purported representation;² 4. No sworn statement of Mr. Richman says directly that he relied on the debtor's purported statement about waiving discharge; rather, Mr. Richman indicates (his Certification at ¶ 7) that he continued to represent the debtor "based on our relationship, and the defendant's representations that he would pay his bill";

5. The debtor paid a significant portion of the attorney charges developed over more than three years; and

6. The debtor was obviously struggling financially, contemplating and discussing with Mr. Richman (and Mr. Richman's partner) bankruptcy, all while participating in what the plaintiff characterizes as a hard-fought and bitter matrimonial case.

In order to establish the § 523(a)(2)(A) exception to discharge, the plaintiff must meet each and every Bankruptcy Code and common law requirement, to prove that the services in question were obtained by "false pretenses, false representation, or actual fraud."³ And reliance, though not specified in the Code, is a necessary factor in determining whether a pretense or representation or other act of fraud induced the nondebtor to part with value. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Reliance must be determined to be both actual⁴ and justified.

The general record sub judice is skeletal at this time. Nevertheless, the court is impelled to evaluate the mixed fact/law question of the attorney's purported justifiable reliance on an oral representation, pre-petition, waiving discharge in bankruptcy. The fundamental point here is that such waivers are void, offending the policy of promoting a fresh start for individual debtors. See In re Cole, 226 B.R. 647, 651 (9th Cir. BAP 1998) (recognizing that "[a]lthough no appellate court has decided the issue, many trial courts have held that pre-petition waivers of the bankruptcy discharge are unenforceable") and cases cited therein at 226 B.R. at 652 nn. 6 and 7. Consider, in particular, In re DiPierro, 69 B.R. 279 (Bankr.W.D.Pa.1987) ("[a] debtor cannot contract away the right to a bankruptcy discharge in advance of the bankruptcy filing"). See the often quoted dicta in Klingman v. Levinson, 831 F.2d 1292, 1296 n. 3 (7th Cir.1987) ("[f]or public policy reasons, a debtor may not contract away the right to a discharge in bankruptcy"). See also Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and Law, 82 CORNELL L.REV. 301, 307-308 (1997) and cases cited therein at footnotes 23 and 24.

The policy against waivers of discharge has been supported most recently in a case involving a pre-petition promise included in a retainer agreement to pay for legal services postpetition. In re Nieves, 246 B.R. 866, 872 (Bankr.E.D.Wis.2000) ("A debtor may not contract away the right to a discharge in bankruptcy. [Citations omitted.] Absent a specific exception to discharge under § 523, the lawyer who furnishes pre-petition bankruptcy services and who is unpaid for such services is in the same boat with other unpaid pre-petition creditors"). And, it would be no small rupture in the policy voiding waivers if an attorney were permitted to assert the waiver as a misrepresentation qualifying the fee-based debt for a § 523(a)(2)(A) exception to discharge. The backdoor to circumventing fresh start policy through "pre-printed" retainer agreement discharge waivers, would be wide open.

Section 524(a) of the Bankruptcy Code is replete with language that a bankruptcy discharge is effective "whether or not discharge of such debt is waived."⁵ The appropriate mechanism for saving a debt from discharge is to comply with the post-petition reaffirmation procedure dictated by the Code in § 524.⁶ Case law makes clear that the reaffirmation procedure is the only mechanism by which a debtor may "waive" discharge of a specific debt, and that the strictness and narrowness of the reaffirmation mechanism reflect "the policy of affording the debtor a broad discharge and an effective fresh start." In re DiPierro, 69 B.R. at 282. See In re Levinson, ...