In re Weinberg
| Decision Date | 31 July 2009 |
| Docket Number | Bankruptcy No. 02-14058-RTB.,BAP No. AZ-08-1281-PaDMo.,Adversary No. 02-01391-RTB. |
| Citation | 410 B.R. 19 |
| Parties | In re Steven Marc WEINBERG and Dana Gretty Weinberg, Debtors. Richard E. Oney and Erin K. Cox Oney, Appellants, v. Steven Marc Weinberg and Dana Gretty Weinberg, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Richard Oney, Tiffany & Bosco, P.A., Phoenix, AZ, for Richard Oney, Erin Cox Oney.
Michael W. Carmel, Phoenix, AZ, for Steven and Dana Weinberg.
Before: PAPPAS, DUNN and MONTALI, Bankruptcy Judges.
Appellants Richard E. Oney ("Oney") and his spouse, Erin K. Cox Oney, commenced an adversary proceeding against chapter 71 debtors Steven Marc Weinberg ("Weinberg")2 and spouse Dana Gretty Weinberg seeking a determination that their claim against Weinberg was excepted from discharge under § 523(a)(2)(A), (4) and (6). The bankruptcy court ruled in favor of Oney under § 523(a)(4) and in favor of Weinberg under § 523(a)(2) and (6). Oney appealed, challenging the amount the bankruptcy court determined was nondischargeable under § 523(a)(4) and the bankruptcy court's rejection of the § 523(a)(2)(A) and (6) claims. We AFFIRM.
Weinberg, an attorney, founded an intellectual property law firm known as the Weinberg Law Group P.C. ("WLG") in early 1999. Weinberg was the firm's president and a director from its inception to its closure on December 17, 2001. He was also the sole shareholder until late 2000 or early 2001 when John Cummerford ("Cummerford") joined the firm.3 At some point in 2001, Cummerford became the manager of the firm, although he appears only to have held the corporate titles of vice president and secretary.
Oney is also an attorney. He practiced intellectual property and patent law for several years as a solo practitioner. He was then employed by WLG from April 1, 1999, through August 31, 2000. The terms of his employment were that he would receive a percentage of WLG's collected receivables attributable to his work, less a share of the expenses incurred by WLG. Oney was to receive $10,000 per month as a draw from WLG, with the difference between his net collections and draws to be calculated quarterly. If this difference favored Oney, he was to be paid that amount by WLG. If the draws had overpaid Oney, he was to reimburse WLG for the difference.
By August 2000, Oney alleges that he had not been paid the amounts owed him by WLG for the previous two quarters. Following discussions between Weinberg and Oney about this situation, Weinberg terminated Oney's employment in an email sent to him on September 11, 2000, retroactive to September 1, 2000. On September 12, 2000, WLG paid Oney $73,962.28, which it alleged represented the amount of his actual undisputed unpaid wages. However, in a letter to WLG dated September 13, 2000, Oney took the position that WLG owed him $378,624.44, which included treble damages for unpaid wages pursuant to Ariz.Rev.Stat. ("A.R.S.") § 23-355.
That same day, Oney filed a complaint in Superior Court, Maricopa County, Oney v. Weinberg Legal Group, PC, no. CV2000-016938 (the "State Court Action"). WLG was the only defendant named in the complaint. Oney alleged that WLG had breached its employment contract with him, and Oney sought treble damages, interest, costs and fees. The complaint made no reference to any tort claims. WLG answered on January 30, 2001, disputing the amounts Oney alleged to be due, noting that it had paid Oney the undisputed portion of his unpaid wages, and asserting twelve affirmative defenses.
Between October 4, 2000, and August 27, 2001, WLG paid Oney an additional $69,695.22 in nine payments as accounts receivable were collected by the firm.
In approximately November 2001, Weinberg and Cummerford decided to close WLG; they joined another law firm as partners on December 18, 2001. Weinberg continued after that date to wind up the affairs of WLG. Mrs. Weinberg was paid a small salary for her services in helping wind up the firm.
On May 15, 2002, Oney moved for summary judgment in the State Court Action. After briefing and argument, the state court granted Oney a partial summary judgment. It found that Oney was an employee of WLG within the meaning of the Arizona Wage Act, A.R.S. § 23-355.4 It further found that the money owed by WLG to Oney constituted wages as defined by the Arizona Wage Act, and that the payment from WLG to Oney on September 12, 2000, of $73,962.13, was untimely. However, the state court determined that questions concerning WLG's good faith, and Oney's claim for treble damages, should be decided by a jury.
Weinberg and Cummerford acted as counsel to WLG in the State Court Action. Oney moved to disqualify them as counsel because they were to be trial witnesses. Oney's motion was unopposed, and the state court disqualified Weinberg and Cummerford effective July 17, 2002. Thereafter, WLG was not represented by counsel.
On August 9, 2002, Oney moved for reconsideration of the state court's partial summary judgment ruling referring the questions of good faith and treble damages to a jury. Since WLG was no longer represented by counsel, the motion was unopposed, and was granted by the state court on September 11, 2002. When WLG was also unrepresented at a pretrial conference held on September 23, 2002, the state court struck WLG's answer to the complaint, vacated the jury trial order, and set a default hearing for October 8, 2002. WLG did not appear at the default hearing.
On December 4, 2002, the state court entered a judgment against WLG in favor of Oney. In addition to the earlier finding in the partial summary judgment that WLG had violated the Arizona Wage Act, the state court concluded that WLG did not have a good faith defense to its failure to pay the wages and determined that Oney was entitled to treble damages on the undisputed amount of $73,962.28 and the disputed amount of $24,579.20, less a setoff for the paid $73,962.28. Thus, the state court awarded Oney $221,662.00 plus interest at 10 percent from September 6, 2000. The state court also awarded Oney $64,682.50 in attorney's fees and costs of $252.00 plus interest at 10 percent.
The Weinbergs filed a petition under chapter 7 of the Bankruptcy Code on September 4, 2002. On their Schedule F they listed a contingent, unliquidated, disputed debt owed to Oney valued at "$0.00" for "potential claim pertaining to Weinberg Cummerford."
Oney commenced an adversary proceeding against Weinberg on December 17, 2002; he filed an amended complaint on August 29, 2003. Oney's amended complaint sought an order from the bankruptcy court determining that he held a claim against Weinberg that was excepted from discharge under § 523(a)(2)(A), (4) and (6), and denying Weinberg's discharge pursuant to § 727(a)(2), (a)(4)(A), and (a)(5). Weinberg answered the amended complaint on September 30, 2003, generally denying the allegations in the complaint.
On June 10, 2005, both parties moved for summary judgment. Weinberg argued for dismissal of both the § 523 claims and the § 727 claims. After a hearing on October 6, 2005, the bankruptcy court dismissed the § 727 claims, concluding that there were no issues of material fact and that Weinberg was entitled to judgment as a matter of law. However, the bankruptcy court denied Weinberg's motion to dismiss and Oney's motion for summary judgment concerning the § 523 claims, and ordered that those claims proceed to trial.
On December 12, 2005, Weinberg moved to bifurcate the trial, requesting that the initial phase focus solely upon Oney's allegations that, at critical times, WLG was insolvent. Over Oney's limited objection, on January 4, 2006, the bankruptcy court granted Weinberg's motion.
The first phase of the trial took place on February 22, 2006. The bankruptcy court heard testimony from Weinberg and Susannah Sabnekar ("Sabnekar"), an accountant appearing as an expert witness for Oney. After receiving post-hearing briefs, and hearing the parties' arguments on March 30, 2006, the bankruptcy court issued its decision concerning WLG's insolvency. Based upon its review of the evidence and testimony, the bankruptcy court determined that WLG was insolvent under the so-called balance sheet test as of November 1, 2001, and that it was never insolvent under the cash flow analysis test. While Sabnekar had testified that WLG was insolvent after September 6, 2000, under the balance sheet test, the bankruptcy court declined to credit this opinion for two reasons.
First, the bankruptcy court disagreed with Sabnekar's analysis that WLG's assets should not include any value for either WLG's work in progress ("WIP") or its accounts receivable ("AR"). The bankruptcy court reasoned that law firms generate income by generating WIP, billing their clients for the WIP, and then collecting the resulting AR. According to the bankruptcy court, "it defies logic to conclude that here no WIP or AR existed."
The bankruptcy court also took exception to Sabnekar's decision, in her insolvency analysis, to include a lease liability of $165,000 for WLG's office space without also accounting for an equivalent asset, the lease, even though Sabnekar was aware that the lease was paid and current through November 1, 2001.
The bankruptcy court remarked that, "because the opinions and conclusions of Sabnekar were not credible, it was extremely difficult and time consuming to sift through the evidence to determine the financial status (solvency or insolvency) of WLG." In performing its own insolvency analysis, the bankruptcy court adjusted Sabnekar's accounting matrix by including assets for WIP and AR, and by deleting the lease liability. Based on these calculations, the court determined that WLG's liabilities exceeded its assets by no later than December 2001, and that WLG became...
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