Richardson v. Douglass (In re Douglass)

• Decision Date: 01 November 2021
• Docket Number: Adv. Case No. 21-01097-PDR,Case No. 20-23389-PDR
• Citation: 634 B.R. 1086
• Parties: IN RE: Georgette DOUGLASS, Debtor. William Richardson, Plaintiff, v. Georgette Douglass, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Florida

634 B.R. 1086

IN RE: Georgette DOUGLASS, Debtor.

William Richardson, Plaintiff,

v.Georgette Douglass, Defendant.

Case No. 20-23389-PDR

Adv. Case No. 21-01097-PDR

United States Bankruptcy Court, S.D. Florida, Fort Lauderdale Division.

Signed November 1, 2021

Richard L. Allen, Krinzman Huss Lubetsky Feldman & Hotte, Mason A. Pertnoy, Miami, FL, for Plaintiff.

Jason Slatkin, Esq., Lorium Law, Fort Lauderdale, FL, for Defendant.

ORDER GRANTING IN PART MOTION TO DISMISS

Peter D. Russin, United States Bankruptcy Judge

Does an attorney, under 11 U.S.C. § 523(a)(4), act in a "fiduciary capacity" in the context of a standard attorney-client relationship? And if a chapter 13 debtor has not sought a hardship discharge, is a claim under 11 U.S.C. § 523(a)(6) ripe? The answer to these questions is simply no and this adversary proceeding is dismissed.

Background

Georgette Douglas (the "Debtor" or "Defendant") represented William Richardson (the "Plaintiff") as his divorce attorney. See In re: Richardson v. Knight , No. FMCE-12-000129 (Fla. 17th Cir. Ct.) (the "Dissolution Case"). After the representation terminated, the Plaintiff sued the Defendant for professional negligence and breach of fiduciary duty arising out of the Defendant's actions in the Dissolution Case. Richardson v. Douglass , No. CACE-2017-009437 (Fla. 17th Cir. Ct.) (the "Malpractice Case"). In the Malpractice Case, the Plaintiff alleged that, despite the Plaintiff's clear statement that he did not agree to the equalization payment included in the proposed Martial Settlement Agreement, the Defendant announced the terms and despite the lack of the required statement on the record or by affidavit by Plaintiff ascending to the agreement, the Defendant failed to prevent the state court from entering a final judgment including the disputed terms (the "Final Judgment of Dissolution").

The Plaintiff retained new counsel and appealed the Final Judgment of Dissolution. On appeal, Florida's Fourth District Court of Appeal remanded the case for further proceedings because the state court "erred by accepting the oral [Marital Settlement Agreement] as valid and incorporating it into the [Final Judgment of Dissolution]" where "it was not based upon either parties’ testimony or sworn statements." Richardson v. Knight , 197 So. 3d 143, 146 (Fla. 4th DCA 2016). Following remand, the parties renegotiated the Marital Settlement Agreement – this time with the correct calculations for the disputed equalization payment – which stated that the Plaintiff was not obligated to make any equitable distribution and was to be refunded the full amount previously paid.

During the Malpractice Case, the Defendant was sanctioned for destroying exculpatory evidence and for failing to comply with a court order. The state court granted summary judgment in favor of the Plaintiff and entered two final judgments totaling $164,029.00 but did not specify whether it was granting relief based on the Plaintiff's professional negligence or breach of fiduciary duty claim. Following the entry of the judgments in favor of the Plaintiff, the Defendant failed to comply with their terms and the Plaintiff sought a contempt order from the state court. Before the motion for contempt could be heard, the Defendant filed her voluntary Chapter 13 petition.

The Plaintiff initiated this adversary proceeding on March 22, 2021, alleging Defendant's debt is nondischargeable under 11 U.S.C. §§ 523(a)(4) and (6). Defendant moves to dismiss the § 523(a)(4) count with prejudice and the § 523(a)(6) count without prejudice.

Legal Standard

Fed. R. Bankr. P. 7012 applies Fed. R. Civ. P. 12 to adversary proceedings. A motion under Rule 12(b)(6) tests the legal sufficiency of a complaint, arguing that the complaint fails to state a claim upon which relief can be granted. See, e.g. , Holloway v. Bizzaro , 571 F. Supp. 2d 1270, 1272 (S.D. Fla. 2008). When considering such a motion, the Court must generally limit its inquiry to the four corners of the complaint and accept all factual allegations as true. See St. George v. Pinellas Cty. , 285 F.3d 1334, 1337 (11th Cir. 2002).

Analysis

The Plaintiff's Complaint seeks a determination that the debt owed to the Plaintiff is nondischargeable because it is a debt under Count I for fraud or defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4), and under Count II for willful or malicious injury to another entity or to the property of another entity under § 523(a)(6). The Defendant argues Count I should be dismissed with prejudice and Count II should be dismissed without prejudice.

I. Count I is dismissed with prejudice as to Malpractice Case allegations and otherwise dismissed without prejudice.

Count I seeks relief under § 523(a)(4), which excepts from discharge all debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" because she: (1) had a fiduciary duty to the Plaintiff as his attorney in the Divorce Case; (2) disregarded the Plaintiff's instructions and fraudulently advised the state court that the Plaintiff agreed to the Martial Settlement Agreement; (3) failed to correct her error once it was discovered; (4) destroyed evidence in the Malpractice Case; and (5) disregarded court orders in the Malpractice Case. The Defendant seeks dismissal of Count I with prejudice because the Defendant was not acting in a fiduciary capacity and, even if she was, the allegations do not support a finding of fraud or defalcation.

A. Allegations Related to Actions During the Malpractice Case

At the outset, the Court notes that § 523(a)(4) requires that the Defendant commit "fraud or defalcation while acting in a fiduciary capacity." Many courts, including the Eleventh Circuit, have explained that the debtor's fiduciary capacity must exist "prior to the act which created the debt." Guerra v. Fernandez-Rocha (In re Fernandez-Rocha) , 451 F.3d 813, 816 (11th Cir. 2006) (quoting Quaif v. Johnson , 4 F.3d 950, 953 (11th Cir. 1993) ); Great Am. Ins. Co. v. Brandt (In re Brandt) , 594 B.R. 829, 832–33 (Bankr. S.D. Fla. 2019) (Ray, J.); Coosemans Miami, Inc. v. Arthur (In re Arthur) , 589 B.R. 761, 766 (Bankr. S.D. Fla. 2018) (Mark, J.) (holding that the Perishable Agricultural Commodities Act did not satisfy the technical trust requirement because it only applies many of the trust-like duties and restrictions after a showing of malfeasance). Though none of these cases dealt with allegations of fraud or defalcation that occurred after the debtor's fiduciary capacity had ended, the plain meaning of the word "while" requires that the alleged fraud or defalcation occur not just after the debtor's fiduciary capacity arises, but also before it ends.

In the Complaint, the Plaintiff asserts that the Defendant violated § 523(a)(4), in part, by destroying evidence and disregarding court orders in the Malpractice Case. Plaintiff does not allege that the Defendant continued in a fiduciary capacity after she was no longer his counsel and was the defendant in the Malpractice Case; any such allegation would seemingly be absurd. Accordingly, none of the allegations relating to the Malpractice Case can possibly form the basis for a claim for fraud or defalcation while acting in a fiduciary capacity. As a result, Count I is dismissed with prejudice to the extent reliant on matters arising in the Malpractice Case.

B. "Fiduciary Capacity"

Whether a debtor was acting in a fiduciary capacity under § 523(a)(4) is a question of federal law. See Fernandez-Rocha , 451 F.3d at 816 ; Quaif , 4 F.3d at 953 ; see, e.g. , Arthur , 589 B.R. at 765. Since at least 1844, the Supreme Court has interpreted "fiduciary" – in the context of the nondischargeability provisions of federal bankruptcy law – as a "strict and narrow" term referring to technical trusts. See Davis v. Aetna Acceptance Co. , 293 U.S. 328, 333, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (Cardozo, J.); Chapman v. Forsyth , 43 U.S. 2 How. 202, 208, 11 L.Ed. 236 (1844) ; see also Quaif , 4 F.3d at 953 ("The Supreme Court has consistently held that the term ‘fiduciary’ is not to be construed expansively, but instead is intended to refer to ‘technical’ trusts."). The technical trust requirement can be satisfied by a relationship created by statute or common law that mirrors the structure of a voluntary, express trust. See Davis , 293 U.S. at 333, 55 S.Ct. 151 ; Jackson v. Jackson (In re Jackson) , 724 F. App'x 905, 910 (11th Cir. 2018) ; Fernandez-Rocha , 451 F.3d at 816 ; Quaif , 4 F.3d at 953–54 ; Brandt , 594 B.R. at 832 ; Arthur , 589 B.R. at 765–66 ; see also Arvest Mortg. Co. v. Nail (In re Nail) , 680 F.3d 1036, 1040 (8th Cir. 2012) ; Fowler & Peth, Inc. v. Regan (In re Regan) , 477 F.3d 1209, 1211 (10th Cir. 2007).

Circuits are split regarding whether an attorney, in the context of a standard attorney-client relationship, acts in a "fiduciary capacity." The Second and Seventh Circuits, for instance, hold that the attorney-client relationship, although usually not involving a technical or express trust, qualifies. The Andy Warhol Foundation for Visual Arts, Inc. v. Hayes (In re Hayes) , 183 F.3d 162, 168 (2d Cir. 1999) ; see also In re Marchiando , 13 F.3d 1111, 1115 (7th Cir. 1994) ("[A] lawyer is deemed the fiduciary of his client, even if he does not manage a fund entrusted to him by the client."). In eschewing a strict technical trust requirement, the Second Circuit focused largely on the fact that the attorney-client relationship involves a difference in knowledge or power between a fiduciary and her principal that gives the fiduciary "a position of ascendancy over the [principal]" and proscribes to the attorney the requirement "to deal fairly, honestly[,] and with undivided loyalty" in a manner that "superimposes ... a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interest, operating competently, safeguarding client property[,] and honoring the clients’ interests over the...