Josel v. Schermer

IN THE U NITED S TATES B ANKRUPTCY C OURT
F OR THE E ASTERN D ISTRICT OF P ENNSYLVANIA
I N RE 	: CHAPTER 7
:
OSCAR SELIG SCHERMER , 	:
DEBTOR 	: BANKRUPTCY NO . 07-14446 SR
J OSEPH EDWARD HYDOCK , II, 	:
PLAINTIFF , 	:
V . 	:
OSCAR S. SCHERMER , 	: ADVERSARY NO . 07-373
DEFENDANT . 	:
OPINION
BY : STEPHEN RASLAVICH , CHIEF UNITED STATES BANKRUPTCY J UDGE .
Introduction.
Before the Court is Debtor’s Motion to Dismiss under Fed.R.Civ.P. 12(b)(6) (“Motion”).
Debtor, Oscar S. Schermer (“Defendant”), contends that the Complaint to Determine
Dischargeability of Debt (“Complaint”), which Joseph Hydock, II (“Plaintiff”) filed in this
adversary proceeding, should be dismissed.
The Complaint asserts that Defendant’s debt to Plaintiff should be excepted from
discharge under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(2)(B), 523(a)(4), 523(a)(6) and 523(a)(19).
However, at the hearing on the Motion, Defendant conceded that the Complaint fails to state
claims under §§523(a)(2)(B) and 523(a)(19), thereby narrowing the exceptions at issue to §§
523(a)(2)(A), 523(a)(4) and 523(a)(6). See Transcript, dated Feb. 26, 2006, at 16, 25. 	Upon
consideration, the Motion shall be denied.
Background
The facts set forth herein are based upon the allegations set forth in the Complaint and its
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1 Judge Herron is a judge in the Orphan’s Court of the Philadelphia Court of Common Pleas.
2
attachments. The factual allegations of the Complaint are accepted as true.
Plaintiff is the father of Joseph Hydock, III, deceased, and the sole heir of his son’s
estate. Complaint ¶ 2. Plaintiff was also named as the executor of the estate, but he renounced
his right to administer the estate to his daughter, Danielle Stauffer (“Daughter”). Id. ¶ 5.
Daughter was appointed as administratrix of the estate; she hired Defendant, who is a lawyer, to
represent her in her capacity as administratrix. Id. ¶ 6. During this time and throughout these
occurrences, Defendant knew or should have known, that Plaintiff could not read or write and
that he was not represented by counsel. Id. ¶ 8.
At Daughter’s request, Defendant prepared a disclaimer (“Disclaimer”) for Plaintiff to
execute renouncing his beneficial interest in the estate. Id. ¶ 7. Daughter convinced Plaintiff to
sign the Disclaimer. Id. On December 12, 2002, Daughter, as administratix of her brother’s
estate, filed Plaintiff’s Disclaimer. See Judge Herron’s opinion, 1 dated July 11, 2007 (attached
as Exhibit 2 to the Complaint) at 2.
Thereafter, Plaintiff obtained counsel and filed a Petition to Set Aside the Disclaimer and
to remove Daughter as administratrix of the Estate. Id. ¶ 9. By Decree, dated February 22,
2006, Judge Herron granted the relief sought and ordered Daughter to file an Account. Id. ¶ 10.
In the opinion accompanying the Decree, Judge Herron stated that Defendant’s “December 5
preparation of the two page disclaimer directly facilitated the substantial and unforgivable acts of
fraud which occurred in this matter and might have been avoided had independent counsel been
obtained by [the Plaintiff].” See Judge Herron’s Opinion, dated February 22, 2006 (attached as
Exhibit 1 to the Complaint) at 12 (underlining added). Judge Herron, did not, however conclude
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2 Section 2503 of Title 42 states, in pertinent part:
The following participants shall be entitled to a reasonable counsel fee as
part of the taxable costs of the matter:
* * *
(7) Any participant who is awarded counsel fees as a
sanction against another participant for dilatory,
obdurate or vexatious conduct during the pendency of a
matter.
* * *
(9) Any participant who is awarded counsel fees because
the conduct of another party in commencing the matter
or otherwise was arbitrary, vexatious or in bad faith.
42 Pa.C.S. §2503(7) & (9).
3
that Defendant had engaged in fraud.
On May 6, 2006, Daughter filed her Account with the Orphan’s Court. Complaint ¶ 12;
see also Judge Herron’s Opinion, dated July 11, 2007, at 4. Plaintiff filed objections to the
Account wherein he raised various issues and asserted a surcharge against the Defendant under
42 Pa.C.S.A. §2503 for costs and attorneys’ fees which Plaintiff incurred in the litigation to set
aside the Disclaimer, to have his Daughter removed as administratrix; and “for other matters
germane to Plaintiff’s interest in the estate.” 2 Complaint ¶ 12 & Judge Herron’s Opinion, dated
July 11, 2007, at 5.
Defendant filed Preliminary Objections to Plaintiff’s Objections. Id. ¶13. In his
Preliminary Objections, Defendant requested the Court to dismiss Plaintiff’s Objections to the
Account to the extent Plaintiff sought to “surcharge him and/or his law firm for attorney fees[.]”
Judge Herron’s Opinion, dated July 11, 2007, at 4.
In a Decree, dated July 11, 2007, Judge Herron overruled the Defendant’s Preliminary
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3 In response to the Account which Daughter filed, Plaintiff also filed a cross-petition for
summary judgment on the issue of the surcharge. Judge Herron concluded that summary judgment could
not be granted because “[t]he award of attorneys fees falls within the discretion of the court, which must
make a factual determination as to the reasonableness of fees incurred.” Judge Herron’s Opinion, dated
July 11, 2007, at 19-20.
4
Objections and ordered a hearing to be held on August 14, 2007 “to consider the reasonableness
of the fees and costs claimed in the representation of Joseph Hydock, Jr. in the disclaimer
litigation.” Decree, dated July 11, 2007 (attached as Exhibit 2 to Complaint.)3 In the opinion
accompanying the July 11 th Decree, Judge Herron observed that the record in the Disclaimer
litigation “is replete with ‘dilatory, obdurate and vexatious conduct’” and that, in the “instant
case, attorney and client [ ] worked together in a vexatious and dilatory fashion to the unfair
detriment of an opposing party – Mr Hydock.” Judge Herron’s Opinion, dated July 11, 2007 at
13. Judge Herron further stated:
[Daughter] with the assistance of her counsel engaged in protracted
litigation to defeat Mr. Hydock’s petition to set aside the
disclaimer, filing petitions for discovery, a motion for summary
judgment, as well as an appeal of the adverse ruling – which was
subsequently abandoned – and filing her account months after it
was due. Moreover, even in this Account, the former
administratrix, with the same counsel listed on the cover sheet,
failed to identify Hydock in the Proposed Statement of Distribution
as the intestate beneficiary of the estate stating, instead, that
distribution was “to be determined by the Court Order.” This
conduct is likewise “dilatory, obdurate or vexatious” under section
2503(7). It cannot be attributed to the administratrix alone, but
was clearly facilitated by her counsel. Neither the administratrix
nor her counsel can plead ignorance of Mr. Hydock’s status as the
sole beneficiary since the record indicates that he and his son’s
deceased mother were listed on July 10, 2002 petition for the grant
of letters as the sole beneficiaries of the estate.
Id. at 13-14. 	Based on his observations and conclusions, Judge Hydock ruled that Plaintiff’s
claim to recover attorney’s fees from Defendant and his law firm was valid under 42 Pa.C.S.A.
§2503(7) & (9).
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On August 2, 2007, Defendant filed his bankruptcy case, thereby staying the hearing
which Judge Herron scheduled on August 14, 2007 to determine the reasonableness of Plaintiff’s
attorneys’ fees. On November 1, 2007, Plaintiff filed his Complaint seeking to have Defendant’s
debt to him for attorneys’ fees and costs held non-dischargeable.
Discussion
Standard of Review
When deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),
the court may consider the allegations contained in the complaint, exhibits attached to the
complaint and matters of public record. Pension Benefit Guaranty Corporation v. White
Consolidated Industries, Inc., 998 F.2d 1192, 1196 (3d Cir. 1993). The court must accept the
factual allegations in the complaint as true, Erickson v. Pardus, ___ U.S. ___, ___, 127 S. Ct.
2197, 2200 (2007), and view all reasonable factual inferences in the light most favorable to the
plaintiff, Angelastro v. Purdential-Bache Securities, Inc., 764 F.2d 939, 944 (3d Cir. 1985).
However, “a court need not credit a complaint’s ‘bald assertions’ or ‘legal conclusions’ when
deciding a motion to dismiss.” Morse v. Lower Merion School District, 132 F.3d 902, 906
(1997). 	“Dismissal is warranted if the allegations of a complaint are not ‘enough to raise a right
to relief above the speculative level ... on the assumption that all the allegations in the complaint
are true (even if doubtful in fact).’” Access Insurance Holdings, Inc. v. Lincoln General
Insurance Company, 2008 WL 859222, at *1 (E.D. Pa. March 28, 2008) (quoting Bell Atlantic
Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007) (citations omitted)).
Purpose of Dischargeability Exceptions
The principle purpose of the Bankruptcy Code is to grant a fresh start to the poor but
honest debtor. See Marrama v. Citizens Bank, ___ U.S. ___, ___, 127 S.Ct. 1105, 1107 (2007).
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The Bankruptcy Code provides “a procedure by which certain insolvent debtors can reorder their
affairs, make peace with their creditors, and enjoy ‘a new opportunity in life with a clear field for
future effort, unhampered by the pressure and discouragement of preexisting debt.’” Grogan v.
Garner, 498 U.S. 279, 286 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).
However, since it is only the honest but unfortunate debtor who is entitled to “a completely
unencumbered new beginning”, Grogan, 498 U.S. at 287, the Bankruptcy Code excepts certain
debts from discharge.
Analysis of Plaintiff’s Nondischargeability Claims under Rule 12(b)(6)
A. Whether the Complaint states a claim under §523(a)(2)(A)?
A debt may be excepted from discharge under §523(a)(2)(A) if it was “for money,
property, services, or an extension, renewal, or refinancing of credit, to the extent it was obtained
by false pretenses, a false representation or actual fraud.” 11 U.S.C. §523(a)(2)(A). Based on
the plain language of this statutory provision, courts have held that a debtor must have obtained
money, property, services, etc. through “false pretenses, false representation or actual fraud” for
this discharge exception to apply. See Nunnery v. Roundtree (In re Roundtree), 478 F.3d 215,
(4th Cir. 2007) (even though defendant who worked for an insurance company acted deceitfully
by obtaining videotape of plaintiff engaging in physical activities under the guise of being her
friend, defendant did not obtain money, services, etc. through her fraud so §523(a)(2)(A)
exception to discharge did not apply); Fledderman v. Glunk (In re Glunk), 343 B.R. 754, 758
(Bankr. E.D. Pa. 2006) (concluding that “[t]he plain language the statute unambiguously
requires, as a threshold matter, that something of value - specifically money, property, services
or an extension, renewal or refinancing of credit - be transferred to the debtor from the creditor
to sustain a claim under §523(a)(2)(A)). See also Cohen v. De La Cruz, 523 U.S. 213, 218
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4 Judge Herron observed that: (i) in September of 2002, Defendant violated his duty under Rule
4.3 of the Pennsylvania Rules of Civil Professional Conduct by failing to advise Plaintiff, who was
unrepresented at the time, to retain counsel; and (ii) Defendant’s preparation of the “two page disclaimer
directly facilitated the substantial and unforgivable acts of fraud which occurred in this matter[.]” Judge
Herron’s Opinion, dated February 22, 2006, at 11-12. However, Judge Herron never concluded that
Defendant engaged in false pretenses or actual fraud or that he made false representations.
7
(1998) (“Once it is established that specific money or property has been obtained by fraud [ ],
‘any debt’ arising therefrom is excepted from discharge.”). Viewing all reasonable inferences in
the light most favorable to the Plaintiff, this requirement has not been met. While the Complaint
alleges that Plaintiff incurred attorneys’ fees and costs for which Defendant should be held
liable, it does not allege that Defendant obtained money, property, services, etc., as a result of
false pretenses, false representations or actual fraud. Moreover, the Complaint does not allege
nor did Judge Herron ever conclude in his opinions (which Plaintiff made a part of the
Complaint) that Defendant engaged in false pretenses, made false representations or committed
actual fraud.4
B. Whether the Complaint states a claim under §523(a)(4)?
Pursuant to §523(a)(4), any debt “for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny” is excepted from discharge. 11 U.S.C. §523(a)(4). The
Complaint fails to assert a claim under this provision because it fails to allege that Defendant
committed fraud, defalcation, embezzlement or larceny.
As noted above, the Complaint does not allege fraud nor did Judge Herron conclude in
either of his opinions that Defendant committed fraud. Rather, Judge Herron strongly suggested
that Defendant’s conduct assisted or enabled Daughter to commit fraud against her father.
Defalcation, for purposes of §523(a)(4), occurs “when a fiduciary misappropriates or fails
to account for money or other property held in trust for another.” Pennsylvania Lawyers Fund
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for Client Security v. Baillie (In re Baillie), 368 B.R. 458, 469 (Bankr. W.D. Pa. 2007) (citing
Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1186 (9th Cir. 1996)). See also Commonwealth Land
Title Co. V. Blaszak (In re Blaszak), 397 F.3d 386, 390 (6th Cir. 2005) (quoting Capital
Indemnity Corp. V. Interstate Agency, Inc. (In re Interstate Agency), 760 f.2d 121, 125 (6th Cir.
1985) (internal quotations omitted)) (defining defalcation as “embezzlement and
misappropriation by a fiduciary, as well as the ‘failure to account for such funds.’”). 	There are
no allegations in the Complaint that Defendant misappropriated or failed to account for money.
Embezzlement is the “‘fraudulent appropriation of property by a person to whom such
property has been entrusted, or into whose hands it has lawfully come.’” Borchardt v. Ferrell (In
re Ferrell), 2006 WL 1997423, at * 9 (Bankr. E.D. Pa. June 14, 2006) (quoting Moore v. United
States, 160 U.S. 268, 269 (1895)). Larceny, on the other hand, occurs when “‘the original taking
of the property was unlawful.’” Mosier v. Oxley (In re Oxley), 2007 WL 2407266, at *6 & n.24
(Bankr. D. Kan. August 20, 2007) (quoting 4 Collier on Bankruptcy ¶523.10[2] (Alan N.
Resnick & Henry J. Sommer eds.-in-chief, 15th ed. rev. 2007)). Plaintiff has not alleged that
Defendant engaged in embezzlement or larceny.
C. Whether the Complaint states a claim under §523(a)(6)?
Section §523(a)(6), excepts from discharge any debt for “willful and malicious injury by
the debtor to another entity or to the property of another entity.” 11 U.S.C. §523(a)(6). A
debtor’s actions are “willful and malicious” for purposes of this discharge exception “only if the
actor purposefully inflicted the injury or acted with substantial certainty that injury would
result.” In re Conte, 33 F.3d 303, 307 (3d Cir. 1994).
In Judge Herron’s opinion, dated July 11, 2007, he concluded that Plaintiff is entitled to
recover from Defendant and his law firm the reasonable attorneys’ fees which Plaintiff incurred
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5 Section 102 defines the term “party” as “[a] person who commences or against whom relief is
sought in a matter” and “includes counsel for such a person who is represented by counsel.” 42 Pa.C.S.A.
§102. Utilizing this definition, Defendant was a party in the Disclaimer litigation.
9
in the Disclaimer litigation under 42 Pa.C.S. §2503(7) & (9). These provisions entitle a
“participant” to recover “reasonable counsel fees as part of the taxable costs of the matter”
against a participant “for dilatory, obdurate or vexatious conduct during the pendency of a
matter,” see 42 Pa.C.S.A. § 2503(7), or against another party if its conduct in commencing a
matter was “arbitrary, vexatious or in bad faith,” see 42 Pa.C.S.A. § 2503(9). In concluding that
Plaintiff was entitled to his reasonable attorneys’ fees under these provisions, Judge Herron
noted that the term “participant” as used subsections (7) and (9) is defined as “[l]itigants,
witnesses and their counsel.” 5 Judge Herron’s Opinion, dated July 11, 2007, at 14 (quoting 42
Pa.C.S.A. §102). Judge Herron concluded that since Defendant was counsel for Daughter who
was the administratrix of the estate when the Disclaimer was filed and while the litigation to set
aside the Disclaimer ensued, Defendant constituted a “participant” in the litigation. Judge Herron
summarized the factual basis underlying his conclusion that Defendant is liable to Plaintiff under
§2503(7) & (9) for the attorney’s fees which Plaintiff incurred in the “litigation to set aside his
disclaimer to any interest in his son’s estate,” stating:
Ms. Stauffer with the assistance of her counsel engaged in
protracted litigation to defeat Mr. Hydock’s petition to set aside
the disclaimer, filing petitions for discovery, a motion for summary
judgment, as well as an appeal of the adverse ruling — which was
subsequently abandoned – and filing her account months after it
was due. Moreover, even in this Account, the former
administratrix, with the same counsel listed on the cover sheet,
failed to identify Hydock in the Proposed Statement of Distribution
as the intestate beneficicary of the estate, stating, instead, that
distribution was “to be determined by the Court Order.” This
conduct is likewise “dilatory, obdurate and vexatious” under
section 2503(7). It cannot be attributed to the administratrix alone,
but was clearly facilitated by her counsel. Neither the
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6 This provision states:
The following participants shall be entitled to a reasonable counsel fee as
part of the taxable costs of the matter:
* * *
(6) Any participant who is awarded counsel fees as a sanction
against another participant for violation of any general rule which
expressly prescribes the award of counsel fees as a sanction for dilatory,
obdurate or vexatious conduct during the pendency of a matter.
42 Pa.C.S.A. § 2503(6).
10
administratrix or her counsel can plead ignorance of Mr. Hydock’s
status as sole beneficiary since the record indicates that he and his
son’s deceased mother were listed on July 10, 2002 petition for the
grant of letters as the sole beneficiaries of the estate.
Judge Herron’s Opinion, dated July 11, 2007, at 13-14.
In In re Connor, 302 B.R. 509 (Bankr. W.D. Pa. 2003), plaintiffs and debtors were
involved in a pre-petition state court action to quiet title which resulted in summary judgment in
favor of the plaintiffs. Thereafter, plaintiffs moved for an award of counsel fees and expenses in
accordance with 42 Pa.C.S.A.. § 2503(6).6 After an evidentiary hearing, the state court found that
the debtors’ conduct had been “dilatory, obdurate and vexatious” during the state court litigation
and awarded plaintiffs $5,718.69 for counsel fees and expenses. Debtors subsequently filed for
bankruptcy and plaintiffs objected to the discharge of debtors’ debt to them (the state court
award of $5,718.69 for counsel fees and expenses) under §523(a)(6). Based on the transcript of
the state court hearing on plaintiffs’ motion under 42 Pa.C.S.A. § 2503(6), the bankruptcy court
stated:
We ... conclude, based on undisputed material facts that debtors’
conduct during the pendency of the action to quiet title, which
conduct that state court determined was dilatory, obdurate and
vexatious, gave rise to a debt for willful and malicious injury to
plaintiffs or their property for purposes of §523(a)(6).
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302 B.R. at 515. Based on the factual conclusions quoted above from pages 13-14 of Judge
Herron’s opinion, dated July 11, 2007, and viewing the allegations in the light most favorable to
the plaintiff as required on a motion to dismiss, plaintiffs have sufficiently alleged a claim upon
which relief can be granted under §523(a)(6).
Summary
For the reasons set forth above, the Motion shall be denied. While the Complaint
fails to state a claim under 11 U.S.C. §§ 523(a)(2)(B) and 523(a)(4), it does state a claim
under 11 U.S.C. §523(a)(6).
By the Court:
Stephen Raslavich
Chief U.S. Bankruptcy Judge
Dated: April 3, 2008
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IN THE U NITED S TATES B ANKRUPTCY C OURT
F OR THE E ASTERN D ISTRICT OF P ENNSYLVANIA
I N RE 	: CHAPTER 7
:
OSCAR SELIG SCHERMER , 	:
DEBTOR . 	: BANKRUPTCY NO . 07-14446 SR
J OSEPH EDWARD HYDOCK , II, 	:
PLAINTIFF , 	:
V . 	:
OSCAR S. SCHERMER , 	: ADVERSARY NO . 07-373
DEFENDANT . 	:
_____________________________________ 	:
ORDER
AND NOW, upon consideration of the Debtor’s Motion under Fed.R.Civ.P. 12(b)(6)
to Dismiss the Adversary Complaint (“Motion”), and after a hearing with notice, and for
the reasons set forth in the attached Opinion, it is hereby O RDERED that:
1. 	The Motion is Granted in part, and Denied in part;
2. 	The Complaint fails to state a claim under 11
U.S.C. §§523(a)(2)(A), 523(a)(2)(B), 523(a)(4) and
523(a)(19), which counts are thus dismissed. It
states a claim under 11 U.S.C. §523(a)(6); and
3. 	Defendant, Oscar S. Schermer, shall file an answer
to the Complaint to the extent not dismissed within
the time prescribed by Rule 7012(a) of the Federal
Rules of Bankruptcy Procedure.
By the Court:
Stephen Raslavich
Dated: April 3, 2008 	Chief U.S. Bankruptcy Judge
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COPIES TO:
Plaintiff’s Counsel
Ralph D. Friedman, Esquire
Friedman and Friedman
261 Old York Road
The Pavilion 	Suite 534
Jenkintown, PA 19046
Stephen C. Josel, Esquire
Josel & Felenane
2019 Walnut Street
Philadelphia, PA 19103
Debtor’s Counsel
Karl Prior, Esquire
Mannion Prior, LLP
550 American Avenue, Suite 302
King of Prussia, PA 19406
Harry J. Giacometti, Esquire
Smith Giacometti, LLC
The Land Title Bldg
100 South Broad Street
Suite 1200
Philadelphia, PA 19110
Chapter 13 Trustee
Lawrence Lichtenstein, Esquire
127 The Mews
Haddonfield, NJ 08033
U.S. Trustee
George Conway, Esquire
Office Of The U.S. Trustee
950W Curtis Center
7th & Sansom Streets
Philadelphia PA 19106
Courtroom Deputy
Nancy Mulvehill
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