In re Lerner

• Decision Date: 28 August 2014
• Docket Number: Case No.: 13–75273–ast
• Citation: 515 B.R. 26
• Parties: In re: Jay Scott Lerner, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

515 B.R. 26

In re: Jay Scott Lerner, Debtor.

Case No.: 13–75273–ast

United States Bankruptcy Court, E.D. New York.

Signed August 28, 2014

Ronald S. Cook, Ronald S. Cook, P.C., Smithtown, NY, for Debtor.

Chapter 7

DECISION AND ORDER DENYING MOTION OF BINDER & BINDER, P.C. TO REOPEN DEBTOR'S CASE

Alan S. Trust, United States Bankruptcy Judge

Issue Pending and Summary of Ruling

Prior to filing for bankruptcy relief, the debtor, Jay Scott Lerner (“Debtor” or“Mr. Lerner”) suffered from a debilitating illness. He hired Binder & Binder, P.C. (“B & B”) to pursue claims that he was permanently disabled before the Social Security Administration (the “SSA”). After his disability claims were granted, the SSA inadvertently paid $6,000.00 to Debtor instead of paying that money to B & B as B & B's legal fee for pursuing his disability claims. Debtor received his bankruptcy discharge and this case was closed. However, B & B now asks this Court to exercise its discretion to reopen this bankruptcy case so that it can file a frivolous nondischargeability complaint against Debtor.¹ B & B alleges Debtor embezzled the $6,000.00 that was inadvertently paid to him by the SSA. For the reasons to follow, the Court concludes that this case should not be reopened for any reason, including for the consideration of sanctions against B & B.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O), 1334(b), and the Standing Order of Reference in effect in the Eastern District of New York dated August 28, 1986 and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011. The following constitutes the Court's findings of fact and conclusions of law made in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) to the extent required. Fed R. Bankr. P. 7052.

BackgroundDebtor's pre-bankruptcy events and bankruptcy case

Prior to the filing of his bankruptcy case, Mr. Lerner was diagnosed and treated for a severe illness. Events in Mr. Lerner's life caused him to suffer symptoms of what his medical professionals and B & B considered to cause a permanent inability to obtain and hold gainful employment. Debtor retained the services of B & B to prosecute and/or advocate his permanent disability claim before the SSA.

In June 2012, Debtor executed a fee agreement with B & B for representation before the SSA (the “Fee Agreement”). The Fee Agreement provided that the fees due and owing B & B were contingent in nature, and depended upon the successful outcome of his claim against the SSA. Specifically, the fees were to be the lesser of:

a. twenty-five percent (25%) of the past due benefits; or

b. the maximum amount set by the Commissioner of the SSA pursuant to 42 U.S.C. § 406(a).

Motion, Ex. 3, public access restricted. This maximum allowable amount was $6,000.00 for cases adjudicated subsequent to June 29, 2012. The term “past-due benefits” was defined in the Fee Agreement to “include all benefits payable to claimants and/or their families/dependents.”

On October 17, 2013, while his claim was pending before the SSA, Debtor filed for chapter 7 relief with the assistance of bankruptcy counsel. Debtor listed B & B as a disputed creditor, but, according to B & B, used an old address for it. In October 2013, the Clerk's office mailed notice of the commencement of the case, advising parties, inter alia, that the § 341 ² meeting of creditors was scheduled for November 26, 2013, and the deadline to file a complaintobjecting to Debtor's discharge or the dischargeability of certain debts was set as January 27, 2014; this notice was served upon Debtor, the Trustee, all scheduled creditors, and all parties in interest, including B & B at the address listed by Debtor. [dkt item 6] Because Debtor's case was filed as a “no asset” case, creditors were also notified by the Clerk's Office not to file claims unless subsequently advised to do so ³. [dkt item 5] B & B claims it did not know of these deadlines or of the no asset notice until after this case was closed.

In his Schedules, Debtor listed as assets his house, and certain personal property worth less than $10,000. He listed various liabilities, including a mortgage against his house. On his Schedule I, he listed his occupation as “disabled,” his income as $2,000 per month of disability income, and included his non-filing spouse's income of $866.67 per month, as well as $1,000 per month of disability income for his dependent son. Per his Schedule J, Debtor's household expenses exceeded his income by $647.31 per month.

Debtor received his discharge on January 29, 2014, and his case was closed that same day.

Debtor subsequently obtained a favorable determination in his SSA action, and on or about April 12, 2014 received a notification from the SSA stating, “[y]our past-due Social Security benefits are $36,080.00 for April 2011 through September 2012.” (the “SSA Notification”). The SSA Notification went on to state:

We have approved the fee agreement between your and your lawyer.

... Because of the law, we usually withhold 25 percent of the total past-due benefits or the maximum payable under the fee agreement to pay an approved lawyer's fee. We withheld $6,000.00 from your past-due benefits. Because of the law, we usually withhold 25 percent of total past-due benefits or the maximum payable under the fee agreement to pay an approved lawyer's/representative's fee. We base the amount of the fee the lawyer/representative can charge on the total past-due benefits.

We inadvertently released all past-due benefits to you; therefore the lawyer/representative will contact you for the payment of the approved fee of $6000.00. If you do not pay the lawyer/representative this approved fee, he can contact us for payment. We will proceed to withhold benefits from you to the extent of the approved fee or the amount that should have been witheld [sic], whichever is smaller.

Motion, para. 8 (emphasis added); Motion, Ex. 4, public access restricted.

B & B's motion to reopen

On May 2, 2014 B & B filed its Motion. B & B argues that because it lacked notice or actual knowledge of Debtor's case due to use of a “bad address” by Debtor, B & B's debt is nondischargeable under § 523(a)(3)(B), because it holds a nondischargeable embezzlement claim under § 523(a)(4). According to B & B, Debtor used an address that Debtor should haveknown was incorrect, because Debtor had interviewed with B & B and executed the Fee Agreement at a different location, and B & B has not operated from the listed address in the last fifteen years. B & B contends that it was only advised of Debtor's discharge in April 2014, when it received a letter from Debtor's counsel regarding Debtor's response to B & B's demand for payment of the $6,000.00. Attached to the Motion is the demand letter dated April 18, 2014 from B & B to Debtor that states:

We recently received a letter from the [SSA] indicating all or part of your authorized fee was released to you in error.... Therefore, I would appreciate it if you could send us the $6,000.00 that was released to you in error.... As you know, when you first retained us, we advised you that the government would pay us directly through your back due benefits, however, occasionally errors like this do occur.

Motion, Ex. 2.

Armed with the knowledge that the SSA had inadvertently released B & B's claimed legal fee of $6,000.00 to Debtor, and with no factual basis to believe that Debtor knew he had received funds that he was not entitled to, B & B inexplicably argues that this case should be reopened so that it can commence an adversary proceeding claiming its disabled former client embezzled the $6,000.00. B & B essentially seeks to convert a potential breach of contract claim against Debtor under the Fee Agreement (failure to pay the $6,000.00 contingency) into a nondischargeable debt.

B & B scheduled the Motion for a hearing on July 1, 2014.

By letter dated May 5, 2014 Debtor's bankruptcy counsel filed a letter stating that Debtor “will represent himself regarding the recent motion to reopen his bankruptcy” and that “my office did not receive any return mail notices indicating that the Binder and Binder address, used in the petition, was outdated.” [dkt item 12]

On July 1, Debtor appeared for the hearing, visibly shaken and distraught. He brought with him a handwritten but undated letter terminating B & B from representing him and a letter of a medical professional dated June 26, 2014 stating that at no time was B & B ever in contact with this medical provider. The Court had the two letters docketed in redacted form to protect Debtor's medical privacy. [dkt item 13] Debtor further contended that he prosecuted his disability claim before the SSA in its entirety without B & B's assistance.

At the hearing, the Court questioned B & B as to a legal theory that might possibly support a colorable claim under § 523(a)(2), (4) and/or (6) of the Bankruptcy Code. As it had in the Motion, B & B asserted “embezzlement.” B & B also advised the Court that it had filed a federal court lawsuit against the SSA seeking to recover the $6,000.00, and advised that often the SSA may seek to recoup an inadvertent payment from future payments owing to a debtor.

The Court also asked B & B about the termination issue, and directed it to file papers related to Debtor's belief that B & B had been terminated before the SSA award was made. On July 16, 2014 B & B filed an affidavit of a B & B non-attorney employee, who stated that “BB's records do not reflect that [Debtor] ever terminated or discharged BB....” [dkt item 14] B & B then listed actions it believed it had taken in aiding Debtor in receiving his disability award, the last of which is listed as having been undertaken on October 26, 2012. B & B also updated this Court on the status of its federal district court action against the SSA. In response, on July 18, 2014...