JACQUELINE P. COX, Bankruptcy Judge.
Bankruptcy courts have statutory authority to "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) ... and may enter appropriate orders and judgments, subject to review under section 158 of this title." 28 U.S.C. § 157(b)(1). Core proceedings include determinations of the dischargeability of a particular debt and objections to discharge, matters at issue herein. 28 U.S.C. § 157(b)(2)(I) and (J).
This matter came before the Court for trial of an Amended Adversary Complaint ("Amended Complaint") filed by the Estate of Stanley Cora against the Defendant, Debtor John C. Jahrling ("Jahrling" and the "Debtor"). However, the appropriate party plaintiff should have been Margaret Kosinska, Executor of the Estate of Stanley Cora because under Illinois and federal law, only the administrator or executor of a decedent's estate can maintain an action on behalf of the decedent. Abiola v. Abubakar, 2003 WL 22012220, at *2 (N.D.Ill.2003); Menerey v. Citizens First Nat'l Bank, 160 Ill.App.3d 223, 225-26, 112 Ill.Dec. 139, 513 N.E.2d 553 (Ill. App.Ct. 3d Dist.1987); Federal Rule of Civil Procedure 17(a)(1)(A) and (B). The Court notes that the issue of whether the Estate of Stanley Cora has standing to bring this adversary proceeding was not addressed by the parties in pleadings or during the trial. Any standing objections or concerns have been waived. National Therapeutic Assocs. v. Concept Rehab, Inc., 2000 WL 1468314, at *1 (N.D.Ill. Sep. 29, 2000) ("However, where-as-here — the standing issue arises under a statute the issue is subject to waiver."). Thus, the Court will rule on the merits of the allegations contained herein.
On December 28, 2012, John C. Jahrling filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code (the "Code").
On May 10, 2013, the Estate of Stanley Cora, (the "Plaintiff" or the "Estate") filed the adversary proceeding ("Adv. Pro. 13-688") herein objecting to the discharge of its particular debt under Code sections 523(a)(4) and 523(a)(6). The Estate also sought to deny the Debtor a discharge of all of his debts under Code sections 727(a)(3) and 727(a)(5). The Estate filed its Amended Complaint Objecting to the Dischargeability of Certain Debts and to the Overall Discharge (the "Amended Complaint") on May 31, 2013.
The Estate seeks to except from discharge a $26,000 state court legal malpractice judgment entered against Jahrling in 2007.
The allegations herein stem from a 2007 state court judgment in the amount of $26,000 entered by Judge Mary Anne Mason in favor of the Estate of Stanley Cora and against the Debtor, in the Circuit Court of Cook County, Illinois, Chancery Division, Case No. 05 CH 12099.
A trial of the Amended Complaint was heard by this Court on July 9-10, 2014. The following facts are taken from the parties' pleadings and the evidence presented at trial.
Debtor John C. Jahrling is an attorney. He was licensed to practice law in Illinois in 2003 when he was contacted by attorney Walter Rywak ("Rywak") to assist with an April 10, 2003 residential real estate closing where Stanley Cora was selling his
In the underlying state court suit, Cora sued the purchasers for Rescission, and Fraudulent Inducement; he sued Jahrling for legal malpractice. His complaint (and an amended count) alleged that he met Demkov a few months before the transaction when Demkov came to his home to bid on a roof repair project which he did not get. It was also alleged that Demkov returned and offered to purchase Cora's property for $35,000, and promised to allow Cora to live in the smaller apartment upstairs rent-free for life. See Adv. Pro. 13-688, Exhibits 1 and 3, dkt. no. 35. It has been alleged throughout these proceedings in both state and federal courts that Stanley Cora wanted to sell the property subject to his retention of a life estate therein.
The April 10, 2003 transaction complained of did not provide for the retention of a life estate by Stanley Cora. After his home was sold for $35,000, he was soon faced with an eviction action.
Jahrling testified at the trial of this matter that Stanley Cora spoke Polish only and that because he did not speak Polish, he did not speak to Cora directly. He communicated with Cora through the purchasers' attorney, Walter Rywak, the person who asked him to participate in the closing. He testified that he did not know that Cora wanted to retain a life estate for himself. Jahrling was paid $400 by check from Rywak for his work at the closing. See Exhibit 2 to Exhibit A, Adv. Pro. 13-688, dkt. no. 48.
On October 2, 2007, Judge Mason ruled that even though Rywak paid Jahrling's fee, Jahrling was Cora's attorney and as such he owed Cora a duty to know what it was that Cora tried to accomplish. Judge Mason noted that when Jahrling responded to a complaint Cora filed against him at the Illinois Attorney Registration and Disciplinary Commission, Jahrling did not deny that he had represented Cora at the closing. She also ruled that it was unreasonable, per se, for an attorney who cannot communicate with his client to rely on counsel for the opposing party for all of his information regarding the transaction. She also ruled that Attorney Rywak got all of his information from the purchasers and that effectively Jahrling knew nothing from his client. See October 2, 2007 Transcript of Judge Mason's Ruling, p. 147, Plaintiff's Trial Exhibit No. 9.
Judge Mason noted that Jahrling admitted at his deposition that he gave advice to Cora. She also ruled that Cora sold a home worth $106,000 for one-third of its market value, did not get the expected life estate and wound up paying for use and occupancy after it was sold. She found that Jahrling's failure to fulfill his responsibilities proximately caused Cora's damages, noting that later that year Demkov and Koval sold the property for $145,000. The original judgment entered damages in favor of Cora in the amount of $68,000 on the legal malpractice claim. The judgment amount was reduced twice: once to $33,000 and
Judge Mason's ruling was based on a negligence claim.
In its Motion for Summary Judgment herein the Estate asked the Court to rule that res judicata precluded Jahrling from re-litigating the issue of whether an attorney-client relationship existed between him and Stanley Cora. Res judicata bars the re-litigation of identical claims when the same parties are involved in a later case after a final judgment has been entered in the earlier matter. Montana v. U.S., 440 U.S. 147, 153, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979) ("Under res judicata, a final judgment on the merits bars further claims by parties or their privies based on the same cause of action."). The application of res judicata to dischargeability actions is improper as such claims can arise only in the context of a bankruptcy proceeding. They involve determining, for example, whether a debt was incurred by fraud (section 523(a)(2)), by defalcation by a fiduciary (section 523(a)(4)), whether the debt was listed or scheduled (section 523(a)(3)), or whether the debt is a domestic support obligation (section 523(a)(5)). Because the issues in dischargeability actions extend beyond liability, claim preclusion under res judicata does not apply. As noted by the Seventh Circuit in Matter of Bulic, 997 F.2d 299, 305 n. 7 (7th Cir.1993), however, "the narrower doctrine of collateral estoppel ... does apply to bankruptcy cases."
In ruling on the Plaintiff's Motion for Summary Judgment and the Defendant's Cross-Motion for Summary Judgment, this Court applied the principle of collateral estoppel, or issue preclusion, in ruling that John C. Jahrling was Stanley Cora's attorney at the April 10, 2003 closing. See April 15, 2014 Memorandum Opinion, Adv. Pro. 13-688, dkt. no. 69, p. 5. Collateral estoppel "bars successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, even if the issue recurs in the context of a different claim." Dexia Credit Local v. Rogan, 629 F.3d 612, 628 (7th Cir.2010). Because the ruling sought to be given preclusive effect was issued by an Illinois state court, Illinois collateral estoppel law controls. Brokaw v. Weaver, 305 F.3d 660, 669 (7th Cir.2002).
Under Illinois law, the following have to be shown for collateral estoppel to apply: (1) the issue decided in the prior proceeding must be identical to the issue in the current action; (2) the party against whom the estoppel is asserted must have been a party or in privity with a party to the prior case; (3) there must have been a final judgment on the merits in the prior action. Colemichael Invs., LLC v. Burke (In re Burke), 398 B.R. 608, 622 (Bankr. N.D.Ill.2008). "In order for a previous judgment to be conclusive, it must appear clearly and certainly that the identical and precise issue was decided in the previous action." In re Burke, at 623. The issue is identical herein — whether Jahrling represented Cora; the parties are identical — Jahrling and Cora, as represented by his estate; and the issue of whether Jahrling represented Cora was resolved in a final judgment on the merits — the $26,000 judgment. In the earlier state court ruling, Judge Mason found that Jahrling was Stanley Cora's attorney at the real estate closing. Her ruling that Jahrling was Stanley Cora's attorney satisfies each of the elements of collateral estoppel and
Jahrling maintained throughout his trial testimony that he was not Cora's attorney at the trial of this adversary proceeding even though this Court had ruled that the state court's finding on that issue was binding. Denials made at trial that he represented Cora lacked credibility; he failed to convince this Court that he was not Cora's attorney.
Count I of the Amended Complaint seeks a ruling excepting the $26,000 legal malpractice debt from discharge under 11 U.S.C. § 523(a)(4) which excepts from discharge debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny. The creditor seeking this relief has to establish that (1) the debtor acted as a fiduciary to the creditor at the time the debt was created, and, (2) that the debt was caused by fraud or defalcation. The term "fiduciary duty" applies in circumstances which, "while not involving trusts in a formal sense, seemed to call for the imposition of the same high standard." In re Marchiando, 13 F.3d 1111, 1116 (7th Cir.1994). The Seventh Circuit also noted that fiduciary relationships involve "a difference in knowledge or power between fiduciary and principal which ... gives the former a position of ascendancy over the later" and that "a lawyer is deemed the fiduciary of his client, even if he does not manage a fund entrusted to him by the client." Id. at 1115. Defalcation includes the misappropriation, embezzlement of money and failure to meet a promise or expectation. Black's Law Dictionary 448 (8th ed. 2007).
After reviewing the pleadings and evidence presented at trial, the Court determines that Jahrling's conduct with regard to his representation of Cora violated at least three Illinois Rules of Professional Conduct ("Rules"), Illinois Supreme Court Rules, Article VIII, 2002. In 2003 Rule 1.1(a) provided:
Illinois Rule of Professional Conduct 1.1(a) (2002).
In 2003 Rule 1.3 provided:
Illinois Rule of Professional Conduct 1.3 (2002).
In 2003 Rule 1.4 provided:
Illinois Rule of Professional Conduct 1.4(a) and (b) (2002).
Rule 1.1 required Jahrling to prepare for his engagement as Cora's attorney. His preparation consisted of speaking to Cora through the attorney for the opposing parties, the purchasers. Had he taken the time to communicate with Cora to assess the situation he might have discerned whether Cora wanted to retain a life estate in the property. Jahrling acted recklessly in not talking directly and confidently to Stanley Cora.
Rule 1.4 required Jahrling to reasonably explain the circumstances surrounding the pending sale of his home. He did not do so. Had he explained the circumstances to Cora, he could have been told whether Cora wanted to retain a life estate in the property being sold.
Jahrling testified that his role at the closing was limited to preparing the closing documents, one of which he signed as the seller's attorney; Cora was the seller. In 2003 Rule 1.2(c) stated: A lawyer may limit the objectives of the representation if the client consents after disclosure. Illinois Rule of Professional Conduct 1.2(c) (2002).
Ten years after the real estate closing in issue, effective July 1, 2013, the Illinois Rules of Professional Conduct were amended to allow lawyers to provide limited scope representation in civil proceedings, as opposed to limiting only the objectives of representation. Rule 1.2(c) now provides:
Illinois Rule of Professional Conduct 1.2(c).
Jahrling was not authorized to provide limited scope representation in 2003. Because the difference in the provision of limited scope representation as opposed to limiting objectives is vague and difficult to delineate, the Court will not base its ruling herein on whether Jahrling could have legitimately limited what he could do for Cora at the real estate closing in issue.
This Court's findings that Jahrling violated Illinois Rules of Professional Conduct 1.1, 1.3 and 1.4 along with Judge Mason's finding that he was negligent in representing Cora may not be enough, however, to support a denial of discharge of a particular debt for defalcation of a fiduciary duty. In Bullock v. BankChampaign, N.A., ___ U.S. ___, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013), the Supreme Court held that the term "defalcation" as used in section 523(a)(4) of the Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to the improper nature of the relevant fiduciary behavior. There a debtor who served as a nonprofessional trustee of a trust established for the benefit of the debtor and his siblings borrowed money from the trust on several occasions. The trust was repaid. His siblings obtained a state court judgment for breach of fiduciary duty, though that court found that there was no apparent malicious motive on the debtor's part. The debtor filed for bankruptcy relief. BankChampaign opposed the debtor's efforts to obtain a discharge of his state-court-imposed debt to the trust. Bullock, at 1757. The bankruptcy court held that because the debt was based on a breach of fiduciary duty, it was non-dischargeable under section 523(a)(4). The District and Circuit Courts affirmed. The Supreme Court held that the term defalcation in the Bankruptcy Code includes a culpable state of mind requirement
The Supreme Court explained that:
Id.
The Court further noted.
(emphasis in text). Id. at 1760.
Jahrling's substandard representation of Cora amounted to the level of gross recklessness as contemplated by the Supreme Court in Bullock. Jahrling, as Cora's attorney, owed him the duties imposed by the Illinois Rules of Professional Conduct to prepare for the engagement, to conduct himself with diligence regarding the engagement and to communicate with Stanley Cora about the engagement. Jahrling's conduct lacked even a scintilla of diligence — he discussed no aspect of the closing with Cora. He did nothing to prepare for the engagement and failed to communicate with his client about the engagement.
The Estate argues that because Jahrling had considerable experience handling real estate transactions in the area he should have known that the $35,000 purchase price was too low. The Estate suggests that Jahrling went along with Rywak's clients to maintain his relationship with Rywak.
The Court rejects the Estate's position that Jahrling should have known that the price was too low. Neither side presented evidence of what comparable homes in the area sold for in 2003 to show whether the price Cora got for his home was too low. Nor did either side offer evidence of the condition of Cora's home. The home's condition is as relevant as the general market value of homes in the area in determining what the home should have sold for.
The Court finds that Jahrling's conduct in representing Cora at the sale of his home without talking to him to discern what Cora wanted and how to accomplish his goal, was a gross deviation from the standard of conduct that a law-abiding person as well as any Illinois attorney would observe in Jahrling's situation. Jahrling consciously disregarded a substantial and unjustifiable risk that his conduct would violate a fiduciary duty. See Pearson v. Howard, 339 B.R. 913, 921 (Bankr.N.D.Ill. 2006) (discharge of a legal malpractice debt was denied, in part, due to attorney's failure to communicate with his client —
Count II of the Amended Complaint seeks a ruling excepting the legal malpractice debt from discharge under Code section 523(a)(6) on several grounds. That section excepts from discharge debts 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).
The Estate alleges that Jahrling failed to supply information about an inheritance he received from his mother at a Federal Rule of Bankruptcy Procedure 2004 examination and that inheritance funds may have been used to pay down mortgage debt of property deeded to his wife. Evidence heard at the trial refutes these allegations. Since at least 2009 the Estate had the records of Jahrling's financial affairs. The Estate complained that Jahrling's failure to renounce his wife's will to take a share of her probate estate amounted to a fraudulent transfer as his refusal to do so was part of a scheme to avoid paying the $26,000 judgement.
Jahrling's wife died on December 2, 2012 leaving a will dated August 18, 2012. See Adv. Pro. 13-688, Defendant's Statement of Facts ("Def.SOF") § 43, dkt. no. 48. The will left all of her assets to Conrad Jahrling, the Debtor's son. Under Illinois law, Jahrling could have renounced the will and received one-third of his wife's estate. The Debtor made no such election and has stated that he has no plans to do so. (Def. SOF, § 44).
After a search of Illinois law, the Court has been unable to find Illinois caselaw directly on point. However, the Court finds In re Brand, 251 B.R. 912 (Bankr. S.D.Fla.2000), cited in the Debtor's brief, to be instructive. In Brand a chapter 7 bankruptcy trustee sought to exercise a debtor's right of election to take an elective share in a decedent's estate in place of the debtor for the benefit of the bankruptcy estate. The court opined:
In re Brand, at 915.
While Brand was decided under Florida law, both Florida and Illinois courts recognize the right of election to be
The Estate also alleges that Jahrling should have provided an accounting of how he disposed of the funds he inherited when his mother died. The Court is satisfied from the evidence heard at trial that Jahrling has accounted for and given to the Estate records of his financial affairs. Jahrling has no liability herein regarding a "missing" inheritance from his mother. Neither the inheritance nor records of it were concealed.
The Estate alleges that Jahrling's acts of "putting the inherited assets somewhere they cannot be located" (Amended Complaint, ¶ 61) was an intentional act to hinder creditors under the Illinois Uniform Fraudulent Transfer Act ("IUFTA"). The Amended Complaint does not specify whether the Plaintiff is alleging actual fraud or lack of equivalency while; insolvent as the basis of its allegation that Jahrling made a fraudulent transfer. The IUFTA provides:
740 ILCS 160/5(a).
The evidence heard at trial does not support this allegation. The Estate posits that when Jahrling received a 2004 inheritance after receiving notice of the Estate's first lawsuit, his transfers of those monies into retirement accounts and use of them for living expenses amounted to fraudulent transfers under Illinois law. The Court disagrees and finds that the Estate has not carried its burden to prove by a preponderance of the evidence that Jahrling's disposition and use of the two inheritances were fraudulent transfers.
Jahrling has asserted a statute of limitations defense. The IUFTA generally requires that fraudulent transfer actions be brought within four years of the transfer, or, if later, within one year after the transfer could reasonably have been discovered by the claimant. 740 ILCS 160/10.
The Estate learned of the 2004 inheritance at least by the time of an October 27, 2009 citation proceeding. See Plaintiff's Rule 56.1 Statement of Material Facts, dkt. no. 38, ¶ 13; Answer to Amended Adversary Complaint Objecting to the Dischargeability of Certain Debts and to the Overall Discharge, dkt. no. 20, p. 17. The statute of limitations had not expired when the Estate filed this adversary proceeding on May 10, 2013, five months before the expiration of the four-year limitation period.
Jahrling posits that the Estate should have filed its fraudulent transfer claim one year after the October, 2009 citation, pursuant to the discovery provision of Illinois' fraudulent transfer limitation statute. The one-year provision is inapplicable. 740 ILCS 160/10 provides that fraudulent transfer actions have to be brought within four years of the transfer, or if filed four years after the transfer, within one year after the transfer was or could have reasonably been discovered by the claimant. The Estate does not rely on the one-year discovery provision. Such would be expected if the Estate had not filed its fraudulent transfer allegation within four years. The Court declines to dismiss this Amended Complaint, or any part thereof, for being untimely filed.
As to the substance of the Estate's fraudulent transfer allegations, the Court finds that the Estate has not carried its burden to prove by a preponderance of the evidence that Jahrling's use of the two inheritances constituted fraudulent transfers. The trial evidence showed that he used the funds to pay living expenses and to establish retirement accounts which the Estate did not seek turnover of in the state court case. The Court reaches this conclusion in consideration of the timing of the deposits and the amount of the expenditures. Jahrling received modest amounts of funds and used them to maintain the modest standard of living he enjoyed before and after 2003.
The Estate argues that Jahrling harmed it by refusing to remit any portion of his income despite receiving its Citation to Discover Assets. Counsel for the Estate admitted numerous times while testifying at trial that the Estate did not seek turnover orders in state court, even though it had records of Jahrling's financial affairs by 2009. The Court declines to find Jahrling's debt nondischargeable for refusing to reveal income. The evidence presented at trial established that his income was revealed by virtue of the turnover of the records of his accounts and financial affairs.
The Estate complains that Jahrling intentionally harmed it by purchasing a car for his son, and titling it in his wife's name. However, the allegation lacks factual specificity and legal grounds. The Court can not discern why this alleged conduct justifies denying the discharge of the debt. The Court will not deny a discharge of the debt for this reason.
None of the Estate's grounds for excepting the legal malpractice debt from discharge
At the conclusion of the Estate's case in chief the Court granted Jahrling's motion for a judgment that the Estate had not met its burden of proof on its section 727(a)(3) and 727(a)(5) claims.
Count III of the Amended Complaint asks that a discharge be denied due to Jahrling's alleged refusal to provide information under Bankruptcy Code sections 727(a)(3) and (a)(5). Section 727 provides that the court shall grant the debtor a discharge, unless:
11 U.S.C. § 727(a)(3).
The Estate alleges that Jahrling's refusal to provide information showing what occurred with the inheritance from his mother despite having been ordered to comply with a Federal Rule of Bankruptcy Procedure 2004 examination made it impossible to identify whether his schedules were accurate. The Court finds otherwise. Trial testimony established that the Estate has been given all required information. The Court will not deny Jahrling a discharge on this ground.
Section 727 provides that the court shall grant the debtor a discharge, unless (a)(5) "the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities...." The Estate again asserts that Jahrling's failure to provide information showing what occurred with the inheritance from his mother supports denying him a discharge. The Court disagrees. There was substantial evidence presented at trial that Jahrling disclosed information relevant to his financial condition and all relevant transactions. There are no unexplained losses or deficiencies of assets. The Court will not deny Jahrling a discharge on this ground.
The Plaintiff, the Estate of Stanley Cora, has satisfied its burden of proving by a preponderance of the evidence that the Defendant John C. Jahrling committed a defalcation as a fiduciary to Stanley Cora under section 532(a)(4) of the Bankruptcy Code. Judgment will be entered in favor of the Plaintiff, the Estate of Stanley Cora, and against the Defendant, John C. Jahrling, on Count I of the Amended Complaint. The Court finds that the $26,000 legal malpractice judgment is nondischargeable.
The Court will enter judgment against the Plaintiff, the Estate of Stanley Cora, and in favor of the Defendant, John C. Jahrling, on Count II — the section 523(a)(6) allegations. The Court will enter judgment against the Plaintiff, the Estate of Stanley Cora, and in favor of the Defendant, John C. Jahrling, on Count III — the section 727(a)(3) and (a)(5) allegations.
This Amended Memorandum Opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Judgment Order was entered herein on August 11, 2014. That Judgment Order stands.
