Matter of Charfoos, Bankruptcy No. 93-46530-S. Adv. No. 93-4915.
| Decision Date | 01 August 1994 |
| Docket Number | Bankruptcy No. 93-46530-S. Adv. No. 93-4915. |
| Citation | 183 BR 131 |
| Parties | In the Matter of Lawrence S. CHARFOOS, Debtor. Paul L. TAI, Plaintiff, v. Lawrence S. CHARFOOS, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
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Ralph E. McDowell, Bodman, Longley & Dahling, Detroit, MI, for plaintiff.
Michael D. Finn, Farmington Hills, MI, for defendant.
On or about April 10, 1987, Defendant guaranteed the payment of a note payable to Plaintiff executed by Gazelle International, Inc. ("Gazelle") in the amount of $100,000.00, and on or about April 15, 1987, Defendant similarly guaranteed a $50,000.00 note payable to Plaintiff by Gazelle. The principal of each note was due one (1) year from the date of its execution together with ten (10%) percent interest. In this action, Plaintiff seeks to have each of these obligations declared non-dischargeable under § 523(a)(2) and (a)(4) of the Bankruptcy Code.
Plaintiff is a podiatrist who, as of December, 1986, had been practicing for fifteen years. For a substantial amount of that period, Plaintiff practiced with another podiatrist in Ann Arbor, Michigan. In association with his practice, Plaintiff began investing in pension-profit sharing or benefit plans, the investment in which required some knowledge or expertise which Plaintiff gained or possessed. Over the years, Plaintiff gained sufficient competency as an investor so that he was looked to by friends and associates with similar kinds of monies to invest for advice on what and how to invest, to the point that, as of August or September of 1986, he became a registered investment advisor under appropriate regulatory legislation. Sometime in 1986, Plaintiff had also formed a venture capital entity used as a vehicle for investing in primarily non-public companies, the main situs of which was in Vancouver, British Columbia.
Defendant is a well-known and successful trial attorney practicing primarily in the products liability and associated fields. Through his wife, Defendant became involved in Gazelle, a company that manufactured and marketed cosmetic products for women of color. In its heyday, Gazelle had offices in New York and Europe. By 1986, Gazelle products were being sold in retail outlets in the United States, France, Belgium and possibly the Caribbean. Defendant, and through him various other friends, acquaintances and/or associates, had invested substantial amounts of money in Gazelle which was in need of additional capital to continue its operations. Defendant was given Plaintiff's name as a possible source of capital for Gazelle sometime in the summer or early fall of 1986. At that time, Defendant contacted Plaintiff and had a number of meetings with him during which Defendant delivered to Plaintiff some samples of Gazelle's products and provided written information about Gazelle, its operations, and its financial status. Defendant testified that he went to a number of meetings and, at one or more of them, met other individuals who had in previous situations invested through or with Plaintiff. Plaintiff testified that initially, at least, he indicated to Defendant he was not particularly interested in Gazelle.
About the same time as those discussions regarding Gazelle were taking place, and specifically in December of 1986, a dispute between Plaintiff and his then podiatry partner erupted resulting in Plaintiff's partner obtaining a temporary restraining order preventing Plaintiff from entering his office. The lawsuit expanded to include the negotiation of terms and conditions under which Plaintiff might be bought out from his practice. The disintegration of Plaintiff's partnership practice proved to be an emotional and difficult experience for Plaintiff. Sometime in early 1987, Plaintiff concluded that his regular business lawyer who had been handling the litigation should be aided or supplanted by more experienced trial counsel. Plaintiff then contacted Defendant, a well-known litigator, to discuss the possibility of representing him in the litigation with his partner. Defendant requested that Plaintiff send him the various lawsuit papers and other associated materials so he could decide whether or not he would undertake the representation. After reviewing the material, Defendant agreed to represent Plaintiff. On or about March 30, 1987, a "Contingency Contract" was entered into between Plaintiff and Defendant's law firm under which the latter undertook to represent the Plaintiff in the litigation for which it was to receive a legal fee in an amount equal to one-third of any recovery or settlement. The contingency agreement was modified on or about April 16, 1987, when Plaintiff and Defendant executed an addendum to their March 30, 1987 agreement which stated that, with reference to the first $500,000.00 awarded, the legal fee would be five percent, rather than one-third of all monies received as provided in the prior agreement. This addendum was added because, by the time Defendant decided to represent him, Plaintiff already had been offered a settlement of approximately $500,000.00.
Sometime around late March, 1987, after Defendant had accepted the representation of Plaintiff, Defendant and Plaintiff met to discuss litigation strategy. Also during the course of the meeting, Defendant told Plaintiff of Gazelle's capital needs, describing them as "short term". Defendant specifically asked Plaintiff to loan $150,000.00 to Gazelle stating that the Defendant would personally guarantee the repayment of the obligation. Plaintiff agreed and within a day or so transferred $100,000.00 to Gazelle, depleting his then readily available funds. A few days later, Plaintiff was able to locate an additional $50,000.00 which he then transferred to Gazelle. Both transfers occurred prior to the time that the note evidencing the repayment of that loan had actually been prepared, signed, and delivered to Plaintiff. Within a week or two after the transfers, the two notes evidencing the repayment obligations were prepared and signed by Gazelle, and Defendant as guarantor, and delivered to the Plaintiff.
With reference to any discussions on Gazelle's and/or Defendant's financial condition, at the time of or in the context of the discussions regarding the loans and any other relevant facts, the Court finds the following to be true:
NOTE PAYABLE
Following the execution and delivery of the notes, Defendant continued to represent Plaintiff in the state court podiatry practice dissolution litigation. In October 1989, that litigation came to a successful conclusion, in the form of a gross settlement to Plaintiff of a $1,100,000 of which Defendant received as fees approximately $150,000.00. There were costs of approximately $120,000.00. At the time of the settlement, Plaintiff asked Defendant if he would then repay in full the amount of the loans (no payments on which had been made) out of the fees being paid to the Defendant's firm. Defendant told Plaintiff that he could not pay Plaintiff out of the attorney's fees because the money did not belong to him individually but rather to the firm.
Under § 523(a)(4) of the Bankruptcy Code a debtor is not discharged from a debt incurred by "fraud or defalcation while acting in a fiduciary capacity". It is Plaintiff's position that a business transaction entered into between an attorney and his client creates a fiduciary relationship running from the attorney to the client. As such, the attorney owes the client certain duties and obligations, including, but not limited to, full disclosure concerning the business transaction, which Defendant failed to perform in this case. Plaintiff argues that those duties and obligations emanate from the common law and are evidenced further by applicable rules of professional conduct.
There can be no question that at the time the loans were made, the attorney-client relationship existed between Plaintiff and Defendant with reference to the litigation involving Plaintiff's professional practice. State law determines the existence or non-existence of the required fiduciary relationship. See, In re Johnson, 691 F.2d 249, 251 (6th Cir.1982). Under Michigan...
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