Labbadia v. Martin (In re Martin), Case No.: 18-31636 (AMN)

• Decision Date: 02 August 2019
• Docket Number: Adv. Pro. No. 19-03001 (AMN),Case No.: 18-31636 (AMN)
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re: BRADFORD J. MARTIN, Debtor PAT LABBADIA III, d/b/a LAW OFFICE OF PAT LABBADIA Plaintiff v. BRADFORD J. MARTIN AND THOMAS W. HOLTHAUSEN Defendants

In re: BRADFORD J. MARTIN, Debtor

PAT LABBADIA III, d/b/a LAW OFFICE OF PAT LABBADIA Plaintiff
v.
BRADFORD J. MARTIN AND THOMAS W. HOLTHAUSEN Defendants

Case No.: 18-31636 (AMN)
Adv. Pro. No. 19-03001 (AMN)

UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTICUT NEW HAVEN DIVISION

August 2, 2019

Chapter 7

Re: AP-ECF Nos. 6, 31

RULING AND MEMORANDUM OF DECISION AND ORDER GRANTING PLAINTIFF'S MOTION TO AMEND COMPLAINT AND GRANTING DEFENDANT'S MOTION TO DISMISS COMPLAINT, IN PART

Before the Court is a motion by defendant and debtor Bradford J. Martin ("Martin") to dismiss counts three through twelve of the complaint brought by Pat Labbadia III, dba Law Office of Pat Labbadia ("Labbadia") for failing to state a claim on which relief may be granted, pursuant to Fed.R.Civ.P. 12(b)(6) and Fed.R.Bankr.P. 7012. AP-ECF No. 6.¹ Also pending before the Court is a motion by Labbadia seeking leave to amend the complaint ("Motion to Amend") and Labbadia's proposed Second Amended Complaint. AP-ECF Nos. 30, 31.

Like many creditors, the plaintiff here is a divorce lawyer whose client filed for bankruptcy without first paying all his attorney's fees. Specifically, the plaintiff protests that prior to filling the bankruptcy petition, the debtor used money promised to the lawyer

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for payment of attorney's fees to purchase an interest in the real property where he lives and asserted homestead exemption to place it beyond the lawyer's reach. Although he devoted a significant portion of the complaint and the hearing on the Motion to Dismiss to that conversion of non-exempt property to exempt property, the plaintiff did not file an objection to the debtor's exemption claim, even though he had notice of the deadline. After that deadline passed without an objection, the property was "withdrawn from the estate (and hence from the creditors) for the benefit of the debtor." Owen v. Owen, 500 U.S. 305, 308 (1991). As exempt property, the real estate cannot be used to satisfy any of the debtor's pre-petition debts, whether or not those debts are dischargeable. See, Schatz v. Access Grp., Inc. (In re Schatz), No. AP 17-00093-MCF, 2019 WL 3432801, at *12 (B.A.P. 1st Cir. July 26, 2019) (exempt home value is unavailable to satisfy pre-petition student loan obligations); Marine Midland Bank v. Scarpino (In re Scarpino), 113 F.3d 338, 340 (2d Cir.1997) ("The effect of exemption is to immunize the exempt property from seizure or attachment for satisfaction of debts incurred prior to the bankruptcy proceeding."); see also 11 U.S.C. § 522(c); Law v. Siegel, 571 U.S. 415, 417-18 (2014).

For the reasons that follow, the Motion to Amend the Complaint is granted, the Motion to Dismiss is granted, in part, and denied, in-part, and the adversary proceeding is dismissed as to Defendant Thomas W. Holthausen.²

For the purpose of clarity, the remaining claims following this decision are: (1) an objection to discharge pursuant to § 727(a)(4)(A),³ (2) an objection to dischargeability

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under §523(a)(2)(A) for damages incurred after an alleged false statement made in or around January 2014, and (3) the determination of Labbadia's claim against Martin pursuant to Counts One, Two, and Three.

I. JURISDICTION

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(b), and the United States District Court for the District of Connecticut's General Order of Reference dated September 21, 1984. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (B), (H), (I), and (J), and the bankruptcy court has the power to enter a final judgment in this adversary proceeding, subject to traditional rights of appeal. This adversary proceeding arises under bankruptcy case number 18-31636 (the "Main Case") pending in this District and venue is proper pursuant to 28 U.S.C. § 1409.

II. FACTS⁴

In 2011, Martin sought a divorce from his wife and retained Labbadia to represent him in a dissolution of marriage proceeding in Connecticut state court (the "divorce case"). Labbadia and Martin signed a written engagement letter dated on or about July 19, 2011. Labbadia worked on the divorce case through and including May 5, 2014 when judgment entered in the case.

At some point in time prior to trial in the divorce case, Martin owed a "substantial amount" to Labbadia, and Martin "stated that he would make a payment toward the balance of the bill, and that he would pay the account in full when the marital home was

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sold." AP-ECF No. 30, p. 8. Labbadia relied on this statement and continued to represent Martin in the divorce case. After the divorce case concluded, Martin hired another attorney to conduct the sale and closing of the martial home. Prior to the sale closing, Attorney Gerald Ryan communicated to Labbadia at 3:40 p.m. on June 13, 2014, by telephone that Martin refused to authorize Attorney Ryan to use funds from the closing to pay the balance owed to Labbadia. Martin and Attorney James Flaherty then thwarted Labbadia's application for a prejudgment remedy in state court when he sought security for his claim.

When Martin did not pay his legal fees, Labbadia commenced a civil action in Connecticut state court. The state court civil action is still pending. Labbadia claims he is owed $63,195.20 in principal and interest as of January 22, 2018. AP-ECF No. 30, p. 4.

At some point during the divorce case, Martin moved into a house (the "Westbrook Property") owned by his long-time friend, Defendant Thomas W. Holthausen (hereinafter "Holthausen") and paid $500.00 per month in rent. Martin resided there with Holthausen throughout the divorce case and up to the filling of the bankruptcy petition.⁵ On September 18, 2018, Martin paid Holthausen $60,000 for a twenty-five percent (25%) interest in the Westbrook Property. There is no dispute that this represented the fair market value of the interest purchased. Martin filed his bankruptcy petition thirteen (13) days after purchasing the interest in the Westbrook Property where he had been living. Martin indicated on his bankruptcy petition that he rented his residence, but also disclosed that he owned a twenty-five percent (25%) interest in the Westbrook Property. AP-ECF

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No. 30, p. 4; ECF No. 1, p. 3, 10. However, Martin did not list any rental payments on his Schedule J expenses. ECF No. 1, p. 25. Martin asserted a state law homestead exemption in the Westbrook Property in the amount of $58,750.00, a motor vehicle exemption in a 2005 Honda Accord, and a $1 exemption in a 2014 Honda Accord. ECF No. 6, p. 8. The 2014 Honda Accord was purchased on July 10, 2018, and an automobile loan from Connex Credit Union encumbers the title. The automobile transaction occurred after Martin retained bankruptcy counsel. AP-ECF No. 30, p. 6.

III. MOTION TO AMEND

After filing his initial response to the Motion to Dismiss, Labbadia filed his Second Amended Complaint and a Motion to Amend Complaint. AP-ECF Nos. 30, 31. Labbadia states in the Motion to Amend that, "[w]hile the plaintiff feels that the original complaint is sufficient, he has decided to file the amendment and this motion to attempt to correct some clerical errors with respect to citations and to attempt to clarify and enhance some of the allegations with which the moving defendant has taken exception." AP-ECF No. 31, p. 2. Holthausen and Martin (collectively "Defendants") opposed the Motion to Amend. AP-ECF No. 37.

The proposed Second Amended Complaint seeks to add allegations that after the conclusion of the divorce case, Martin refused to use proceeds from the sale of his marital house to pay his legal debts to Labbadia. It also identifies the specific provisions of the bankruptcy code Defendant Martin allegedly violated in Count Four and adds a claim for unjust enrichment among several other changes.

Pursuant to Fed.R.Civ.P. 15(a)(2), made applicable to this adversary proceeding by Fed.R.Bank.P. 7015, a pleading may be amended with the opposing party's written

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consent or the court's leave. "Rule 15(a) declares that leave to amend shall be freely given when justice so rewe went quires." Foman v. Davis, 371 U.S. 178, 182 (1962). The rule in the Second Circuit is to allow a party to amend its pleadings in the absence of bad faith or prejudice to the non-movant. Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993) (citing State Teachers Retirement Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir.1981)).

Because the proposed Second Amended Complaint does not prejudice the Defendants, justice is best served by allowing the amendments. Therefore, Labbadia's Motion to Amend the Complaint, AP-ECF No. 31, will be granted.

In his opposition to the Motion to Dismiss, Labbadia asserted that the motion would be more appropriate as one for a more definite statement under Rule 12(e). AP-ECF No. 71, p. 7, 17. However, Labbadia had an opportunity to file a more definite statement in this case and he has done so. Based on the statements made during a hearing on July 31, 2019, the request to file a more definite statement is denied.

IV. PROCEDURAL HISTORY

Martin commenced the Chapter 7 bankruptcy proceeding in the Main Case on October 1, 2018 (the "Petition Date"). The Meeting of Creditors closed on November 6, 2018, and the period to file objections to exemptions expired on December 6, 2018.⁶ See, 11 U.S.C. § 522(f). No objections to any of Martin's claimed exemptions were filed. The period for objecting to Martin's bankruptcy discharge pursuant to 11 U.S.C. § 727, or to

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dischargeability of a specific claim pursuant to 11 U.S.C. § 523, expired on January 7, 2019. Labbadia attempted to docket an adversary proceeding in the Main Case on January 7 and January 8, 2019. See, ECF Nos. 12, 13, 14. The Court issued an order permitting the commencement of an adversary proceeding filed no later than January 9, 2019, so that the technical deficiencies could be cured. ECF No. 15. Thereafter, Labbadia filed a complaint that...