Revo Law Firm, P.C. v. Knighten et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Revo Law Firm, P.C. v. Allan L. Knighten, et al.
04-01146
Memorandum Opinion re: [11-1] Motion For Summary Judgment, Statement of
Undisputed Facts, and Memorandum of Law by Revo Law Firm, P.C. .
Received on: 2005-04-06 11:04:06.000
2005-04-06 00:00:00.000
2005-04-07 00:00:00.000
James Burke
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1 Defendants’ Motion for Summary Judgment (doc. 8) and
Request for Attorney Fees (doc. 9) and Memorandum in Support
(doc. 10), Plaintiffs’ Response (doc. 14) and Defendants’
Reply (doc. 16); Plaintiff’s Motion for Summary Judgment and
Memorandum in Support (doc. 11), Defendants’ Response (doc.
13) and Plaintiffs’ Reply (doc. 15).
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
ALLAN L. KNIGHTEN and
PATRICIA M. KNIGHTEN,
Debtors. No. 7-04-12813 SA
REVO LAW FIRM, P.C.,
Plaintiff,
v. Adv. No. 04-1146 S
ALLAN L. KNIGHTEN, et al.,
Defendants.
MEMORANDUM OPINION ON CROSS
MOTIONS FOR SUMMARY JUDGMENT
This matter is before the Court on cross motions for
summary judgment1. Plaintiffs appear through their attorney
The Law Office of George “Dave” Giddens, PC (Dave Giddens).
Defendants appear through their attorney the Law Office of
Gerald R. Velarde (Gerald Velarde). This is a core
proceeding. 28 U.S.C. § 157(b)(2)(I).
Federal Rule of Civil Procedure 56(c) provides, in part,
“The judgment sought shall be rendered forthwith if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and
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Page -2-
that the moving party is entitled to a judgment as a matter of
law.” Therefore, if the Court finds that a material fact is
in dispute, summary judgment should be denied. The Court’s
task at summary judgment is not to assess the credibility of
conflicting testimony. Starr v. Pearle Vision, Inc., 54 F.3d
1548, 1557 (10th Cir. 1995)(citing Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255 (1986)(“Credibility determinations,
the weighing of evidence, and the drawing of legitimate
inferences from the facts are jury functions, not those of a
judge, whether he is ruling on a motion for summary judgment
or for a directed verdict.”)). Finally, the Court examines
the factual record and reasonable inferences therefrom in the
light of the nonmovant. Thomas v. International Business
Machines, 48 F.3d 478, 484 (10th Cir. 1995); Cole v. Ruidoso
Municipal Schools, 43 F.3d 1373, 1377 (10th Cir. 1994).
Whether a fact is material is determined by the
substantive law governing the case. Anderson, 477 U.S. at
248. Therefore, the Court will briefly review the causes of
action asserted to establish the framework for materiality.
The Complaint (doc. 1) seeks a determination that Plaintiffs’
debt is nondischargeable under 11 U.S.C. § 523(a)(2)(A) or
(4). Those sections provide:
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2 In these motions for summary judgment, however, the
Court does not resolve doubts – its only function is to
determine if there are disputed material facts.
Page -3-
(a) A discharge under section 727 ... of this title
does not discharge an individual debtor from any
debt--
...
(2) for money, property, services, or an extension,
renewal, or refinancing of credit, to the extent
obtained by--
(A) false pretenses, a false representation, or
actual fraud, other than a statement respecting
the debtor's or an insider's financial
condition;
...
[or]
(4) for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny.
To succeed on a Section 523(a)(2)(A) claim, the creditor
must prove 1) the debtor made a false representation, 2) the
debtor made the representation with the intent to deceive the
creditor, and 3) the creditor relied on the representation.
Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th
Cir. 1996). The creditor’s reliance must have been
justifiable. Field v. Mans, 516 U.S. 59, 77 (1995). Finally,
the debtor’s representation must have caused the creditor to
sustain the loss. Young, 91 F.3d at 1373. At trial, any
doubts must be resolved in the debtor’s favor2. Chevy Chase
Bank FSB v. Kukuk (In re Kukuk), 225 B.R. 778, 782 (10th Cir.
BAP 1998).
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To succeed on a Section 523(a)(4) claim, the creditor
must prove one of three things: (1) fraud or defalcation while
acting as a fiduciary; (2) embezzlement; or (3) larceny. No
fiduciary relationship is necessary for embezzlement or
larceny. Great American Ins. Co. v. Graziano (In re
Graziano), 35 B.R. 589, 593-94 (Bankr. E.D. N.Y. 1983).
To succeed on a Section 523(a)(4) fiduciary duty claim,
the creditor must prove (1) the existence of a fiduciary
relationship between the debtor and the objecting creditor,
and (2) a defalcation committed by the debtor in the course of
that relationship. Antlers Roof-Truss & Builders Supply v.
Storie (In re Storie), 216 B.R. 283, 286 (10th Cir. BAP 1997).
To succeed on a Section 523(a)(4) embezzlement claim a
creditor must prove (1) entrustment to the debtor, of (2)
property, (3) of another, (4) which the debtor appropriates
for his or her own use, (5) with intent to defraud. Adamo v.
Scheller (In re Scheller), 265 B.R. 39, 53 (Bankr. S.D. N.Y.
2001). See also Driggs v. Black (In re Black), 787 F.2d 503,
507 (10th Cir. 1986):
"Embezzlement, for purposes of 11 U.S.C. § 523 'is
the fraudulent appropriation of property by a person
to whom such property has been entrusted, or into
whose hands it has lawfully come, and it requires
fraud in fact, involving moral turpitude or
intentional wrong, rather than implied or
constructive fraud.' " United States Life Title
Insurance Co. v. Dohm (In re Dohm), 19 B.R. 134, 138
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3 Larceny differs from embezzlement only with respect to
the manner in which the property comes into possession of the
wrongdoer. Scheller, 265 B.R. at 54.
Page -5-
(Bankr. N.D. Ill.1982) (quoting American Family
Insurance Group v. Gumieny (In re Gumieny), 8 B.R.
602, 605 (Bankr. E.D. Wis.1981)).
Embezzlement requires that the original receipt or taking of
the property be legal. Scheller, 265 B.R. at 54. The
property taken must also be another’s, because one cannot
embezzle one’s own property. Id.
To succeed on a Section 523(a)(4) larceny claim a
creditor must prove (1) the wrongful taking, of (2) property,
(3) of another, (4) without the owner’s consent, and (5) with
the intent to convert the property. Id. at 53. See also
United States v. Smith, 156 F.3d 1046, 1056 (10th Cir. 1998),
cert. denied, 525 U.S. 1090 (1999)(citing Black’s Law
Dictionary 1477 (6th ed. 1990) defining “larceny” as the
“[f]elonious stealing, taking and carrying, leading, riding,
or driving away with another’s personal property, with intent
to convert it or to deprive owner thereof.”) Larceny requires
that the original taking of the property be unlawful3.
Scheller, 265 B.R. at 54. The property taken must also be
another’s, because one cannot convert one’s own property. Id.
FACTS
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4 Ms. Knighten appears as a defendant because the state
court ruled, as described below, that the debt that is the
subject of this adversary proceeding was a community debt.
Any specific reference to her will be as “Ms. Knighten.”
Page -6-
Based on the answers to the complaint and the parties’
statements of facts that were admitted or deemed admitted in
the summary judgment motions, the Court finds as follows:
1. On or about May 1, 1991, Mr. Knighten (“Defendant”)4, who
is an attorney, became an employee of the Revo Law Firm,
PC and/or M. Terence Revo (collectively “Revo” or
“Plaintiffs”).
2. On or about February 1, 1993, Margaret Bryant engaged
Revo to represent her in a personal injury action. Ms.
Bryant is Defendant’s sister.
3. The Revo firm did some work on the Bryant claim and
received a contingency fee for partial settlement of the
case. Later, Defendant and the Revo staff did a small
amount of work on the remaining larger claims.
4. On or about December 1, 1995, Defendant’s employment with
Revo was terminated.
5. Thereafter, Revo and Defendant agreed on which cases
Defendant would take with him and continue representation
on, and how settlements, costs and fees would be divided
between them. There were different agreements for each
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Page -7-
case, and none were reduced to writing. One case taken
was the Bryant matter. The parties’ agreement regarding
the Bryant matter was that Revo was releasing the file to
Defendant and Revo would receive 40% of any contingency
fee if the case settled immediately, but if it did not
settle immediately, then the parties would divide the fee
in a method that was fair in accordance with the work
performed.
6. Thereafter, Revo and Defendant remained in contact
regarding the cases.
7. Defendant took other cases with him and the parties
divided the fees in accordance with their agreements.
8. It took two years of extensive work solely performed by
Defendant before he was able to settle the Bryant case
for what he and the client thought was fair.
9. On or about January 16, 1998, the Bryant matter settled
and Defendant deposited $122,595 into his attorney trust
account.
10. On or about February 2, 1998, Defendant withdrew
$91,487.49 from the trust account representing the
contingency fee for the Bryant matter. He set aside no
money to pay Revo.
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Page -8-
11. On or about May 1, 1999, Defendant advised Revo of the
Bryant settlement. They later met and Defendant provided
documentation regarding the settlement. Defendant
offered Revo $8,666.66, the amount he thought was fair
according to their agreement.
12. Revo refused the offer and demanded $36,595, which is 40%
of the fee.
13. The parties subsequently never agreed on a fair amount.
14. Revo filed a complaint for Debt and Money Due and
Conversion in the New Mexico state courts on February 5,
2001.
15. On March 10, 2004, the state court awarded Revo judgment
against Defendant and Ms. Knighten in the amount of
$14,444.44 plus costs, pre- and post-judgment interest.
The state court disagreed that Revo was entitled to 40%
of the fee; it found that the agreement had been
“whatever was fair.” The state court made no findings on
conversion.
16. Defendant and Ms. Knighten filed a voluntary petition
under Chapter 7 of the Bankruptcy Code on April 16, 2004.
17. Revo timely filed this adversary proceeding.
THE SUMMARY JUDGMENT MOTIONS
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Page -9-
Briefly, Plaintiffs’ motion argues that the established
facts indicate that Defendant never had an intent to repay.
Specifically, he never set aside funds from the settlement, he
informed Revo of the settlement only much later, and at the
state court trial he testified that he believed Revo deserved
to be paid $0 to $5,000. Plaintiffs also argue that all
circumstantial evidence also shows the lack of intent to
repay.
Next, Plaintiffs argue that Defendant was a fiduciary
because he agreed to pay Revo when the case was settled. They
also argue that the New Mexico Rules of Professional Conduct
for lawyers conclusively establish the requisite trust. As to
embezzlement and larceny, Plaintiffs basically say the facts
speak for themselves.
Defendants’ motion urges that, under the doctrine of
collateral estoppel, there was no finding of fraud or
conversion so the adversary should be dismissed.
Specifically, they also argue that there is no evidence in the
record that there were any misrepresentations at the time the
statements were made, and no evidence of an intent to defraud.
Defendants also argue that a misrepresentation claim cannot be
based on future events. As to embezzlement, they urge that
there is no evidence of fraudulent intent. And, as to
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Page -10-
larceny, they claim that because the state court awarded a
lesser amount to Revo than it claimed, there is a question as
to what property of another is involved.
Both motions raise the issue of attorney fees under 11
U.S.C. § 523(d). That section states:
If a creditor requests a determination of
dischargeability of a consumer debt under subsection
(a)(2) of this section, and such debt is discharged,
the court shall grant judgment in favor of the
debtor for the costs of, and a reasonable attorney's
fee for, the proceeding if the court finds that the
position of the creditor was not substantially
justified, except that the court shall not award
such costs and fees if special circumstances would
make the award unjust.
“Consumer debt” is defined at 11 U.S.C. § 101(8) as “debt
incurred by an individual primarily for a personal, family, or
household purpose.” The Court finds that the debt involved in
this case is not a consumer debt and therefore section 523(d)
does not apply. Summary judgment will be granted to
Plaintiffs on this issue.
CONCLUSIONS OF LAW
1. Collateral Estoppel.
In general, collateral estoppel does not apply to the
issues currently before the Court. See Archer v. Warner, 538
U.S. 314, 320-21 (2003)(a claim reduced to judgment before
bankruptcy does not bar inquiry into the true nature of the
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Page -11-
debt)(quoting Brown v. Felsen, 442 U.S. 127, 138 (1979)). No
issues of dischargeability were raised in the state court (nor
could they have been years before the bankruptcy). The state
court’s judgment contained no findings, it only awarded
judgment and declared that the debt was a community debt.
While the amount of the debt and the community liability of
Ms. Knighten were conclusively established, those are not
issues today.
2. The 523(a)(2)(A) claim.
First, Defendants are not entirely correct that a
misrepresentation claim cannot be based on future events. A
statement about the future can misrepresent an existing fact.
For example, if Mr. Knighten stated he would pay in the future
but, at the time, knew he would not, this would be actionable.
See Kukuk, 225 B.R. at 784 (quoting Restatement (Second) of
Torts (1976) § 525 cmts. e, f). See also Fleming v. Sagan,
218 B.R. 494, 500 (Bankr. W.D. Mo. 1998)(Attorney creditor
proved that attorney debtor never intended to honor fee split
agreement.)
The intent at the time of the agreement is the issue in
this case. The Court finds that none of the established facts
show Defendant’s intent at the time the oral agreement was
made. Plaintiffs proved that Defendant did not set aside
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Page -12-
funds, that he did not timely inform Revo of the settlement,
and that he testified at trial he believed Revo only deserved
$0 to $5,000. All these events occurred long after the date
of the representations. They do not prove that Defendant did
not intend to pay when he entered the contract. In fact,
Plaintiffs recognize this possibility. See Plaintiffs’
Response to Defendants’ Motion for Summary Judgment, doc 14 at
p. 5 (“After the agreement, Knighten later unilaterally
changed his mind about the agreement without informing
[Revo]”). While the above facts may be relevant to
determining Defendant’s earlier intent, they are not
conclusive. Therefore the Court cannot find that there was a
misrepresentation, or that there was an intent to deceive.
The Court needs a trial on this issue.
3. The 523(a)(4) fiduciary duty claim.
The existence of a fiduciary duty for section 523(a)(4)
is a question of federal law, not a “fact” that can be pled.
Van de Water v. Van de Water (In re Van de Water), 180 B.R.
283, 289 (Bankr. D. N.M. 1995)(Fiduciary capacity is a
question of federal law; the general definition of fiduciary
is too broad in the dischargeability context.); Fowler Bros.
v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir. 1996)
(“The existence of a fiduciary relationship under § 523(a)(4)
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Page -13-
is determined under federal law.”) In Employers Workers’
Compensation Assoc. v. Kelley (In re Kelley), 215 B.R. 468,
471-72 (10th Cir. BAP 1997), the Tenth Circuit Bankruptcy
Appellate Panel discussed fiduciary duty:
Section 523(a)(4) of the Bankruptcy Code excepts
from discharge any debt "for fraud or defalcation
while acting in a fiduciary capacity." The Tenth
Circuit recently explained the meaning of "fiduciary
capacity" in this provision.
The existence of a fiduciary relationship under
§ 523(a)(4) is determined under federal law.
However, state law is relevant to this inquiry.
Under this circuit's federal bankruptcy case
law, to find that a fiduciary relationship
existed under § 523(a)(4), the court must find
that the money or property on which the debt at
issue was based was entrusted to the debtor.
Thus, an express or technical trust must be
present for a fiduciary relationship to exist
under § 523(a)(4). Neither a general fiduciary
duty of confidence, trust, loyalty, and good
faith, nor an inequality between the parties'
knowledge or bargaining power, is sufficient to
establish a fiduciary relationship for purposes
of dischargeability. "Further, the fiduciary
relationship must be shown to exist prior to the
creation of the debt in controversy." [Allen v.
Romero (In re Romero)], 535 F.2d [618,] 621
[(10th Cir. 1976)].
Fowler Bros. v. Young (In re Young), 91 F.3d 1367,
1371-72 (10th Cir. 1996)(additional citations
omitted). We are, of course, obliged to apply this
narrow view of the fiduciaries who are covered by §
523(a)(4).
The Kelley court also noted that state statutes often, but not
always, impose trusts on persons held to be fiduciaries as a
matter of law based on their relationships. Id. at 473. See
also Van de Water, 180 B.R. at 289 (“The trust requirement is
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5 See also Davis v. Aetna Acceptance Co., 293 U.S. 328,
333 (1934): “It is not enough that, by the very act of
wrongdoing out of which the contested debt arose, the bankrupt
has become chargeable as a trustee ex maleficio. He must have
been a trustee before the wrong and without reference
thereto.”
Page -14-
not limited to trusts arising out of a formal agreement, but
includes relationships in which trust-type obligations are
imposed pursuant to statute or common law.”)(Citation
omitted.) A state statute must meet three requirements to
trigger section 523(a)(4)’s fiduciary status: (1) the trust
res must be defined by the statute, (2) the statute must spell
out the fiduciary duty, and (3) the statute must impose a
trust on funds prior to the act creating the debt. Kelley,
215 B.R. at 473.5
The Court finds that there was no fiduciary duty
sufficient to satisfy Section 523(a)(4) in this case.
Defendant may have owed some general duties to Revo of
confidence, trust, loyalty or good faith, but that is not
enough. First, no express trust was created.
Second, Revo did not “entrust” the $14,444.44 to the
Defendant. This amount is only what the state court found
Defendant owed to Revo after lengthy litigation, in
determining a fair division of the fees. See Fowler Bros., 91
F.3d at 1371 (“Under this circuit’s federal bankruptcy case
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6 The Court will not address the question of whether these
rules could even give rise to Plaintiffs’ claims. “Violation
of a rule should not give rise to a cause of action nor should
it create any presumption that a legal duty has been breached.
The rules are designed to provide guidance to lawyers and to
provide a structure for regulating conduct through
disciplinary agencies. They are not designed to be a basis
for civil liability.” NMRA, Rules of Professional Conduct,
Scope.
Page -15-
law, to find that a fiduciary relationship existed under §
523(a)(4), the court must find that the money or property on
which the debt at issue was based was entrusted to the
debtor.”)
Third, the “trust” imposed by the New Mexico Rule of
Professional Conduct does not meet the Kelley three-part test
for Section 523(a)(4)6. Rule 16-115(C), NMRA states:
Severance of interest. When in the course of
representation a lawyer is in possession of property
in which both the lawyer and another person claim
interests, the property shall be kept separate by
the lawyer until there is an accounting and
severance of their interests. If a dispute arises
concerning their respective interest, the portion in
dispute shall be kept separate by the lawyer until
the dispute is resolved.
This rule probably establishes a trust. It identifies the
trust res, i.e., the property in which both the lawyer and
another person claim interests. This meets the first Kelley
requirement. However, it spells out no fiduciary duties with
respect to the property. See Kelley, 215 B.R. at 473 (“Simply
restricting commingling of funds does not sufficiently define
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Page -16-
the fiduciary duty imposed here to bring the statute within §
523(a)(4).”); Holaday v. Seay (In re Seay), 215 B.R. 780, 788
(10th Cir. BAP 1997)(A general duty not to dispose of assets
does not create the fiduciary duty to support § 523(a)(4)).
Therefore, the Rule does not satisfy the second Kelley
requirement. Finally, the Rule imposes no duty on a lawyer
before he or she comes into property in which another claims
an interest. It fails to meet the third Kelley requirement.
Cf. Reilly v. Miano (In re Miano), 265 B.R. 352, 356 (Bankr.
D. Ct. 2001)(The Connecticut Bar Association Formal Opinion 31
imposes a duty on an attorney to set aside the entire fee
until co-counsel fee disputes are resolved. Bankruptcy Court
held that any fiduciary duty that existed did so as a result
of the debt and did not precede the debt, therefore Section
523(a)(4) was not implicated.)
The Court finds that there was no fiduciary duty in this
case. This conclusion is supported by all the cases found by
the Court on this issue. Johnson v. Waldman (In re Waldman),
92 F.3d 546, 547 (7th Cir. 1996); Jeffrey M. Goldberg & Assoc.,
Ltd. v. Holstein (In re Holstein), 272 B.R. 463, 482 (Bankr.
N.D. Ill. 2001); Miano, 265 B.R. at 355-56; Weisberger v. Guth
(In re Guth), 210 B.R. 294, 297 (Bankr. N.D. Ohio 1997); Gore
v. Kressner (In re Kressner), 206 B.R. 303, 312 (Bankr. S.D.
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N.Y. 1997). See also Canel and Hale, Ltd. v. Tobin, 304
Ill.App.3d 906, 917, 710 N.E.2d 861, 871, 238 Ill.Dec. 64, 74
(1999) (Attorney fee-share agreements do not create fiduciary
duties.)
In summary, the Court finds that there was no fiduciary
duty and that the Section 523(a)(4) claim should be dismissed.
4. The 523(a)(4) embezzlement and larceny claims.
The Court finds that the embezzlement and larceny claims
should be dismissed. Central to each of these claims is the
requirement that property of another is taken away. There is
nothing in the record that shows that this was anything other
than a contract dispute, or possibly a fraud claim.
5. Defendants’ affirmative defenses.
Defendants raised three affirmative defenses. The Court
finds that the first, laches, should be stricken. Plaintiffs
filed this adversary before the 60 day limitation of
Fed.R.Bankr.P. 4007(c). Defendants did not respond to
Plaintiffs’ arguments in the summary judgment papers that
laches was inapplicable, or explain how they were damaged.
See Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d
829, 835-36 (9th Cir.), cert. denied, 537 U.S. 1047 (2002).
The second and third affirmative defenses, res judicata
and collateral estoppel, should also be stricken. See
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generally Archer v. Warner, 538 U.S. 314 (2003). This Court
can and should look behind the state court judgment, and the
judgment made no specific findings relative to this matter.
Orders will enter.
Honorable James S. Starzynski
United States Bankruptcy Judge
I hereby certify that on April 6, 2005, a true and correct
copy of the foregoing was electronically transmitted, faxed,
delivered, or mailed to the listed counsel and/or parties.
George D Giddens, Jr
10400 Academy Rd NE Ste 350
Albuquerque, NM 87111-1229
Gerald R Velarde
PO Box 2226
Albuquerque, NM 87103-2226
Denise Archuleta
10400 Academy Rd NE Ste 350
Albuquerque, NM 87111-7372
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