James P. Smith, Chief United States Bankruptcy Judge.
This is an adversary proceeding in which Plaintiff seeks to have its claim against Debtor R. Scott Appling
The matter was tried on September 18 and 23, 2014. At the conclusion of the trial, the Court requested that the parties submit their closing arguments in writing. By consent of the parties, the written arguments were delayed until a transcript of the trial was obtained. The transcript has now been prepared and filed and the final brief was filed in the case on January 21, 2015. Having considered the testimony and exhibits introduced at trial, the arguments of counsel and the law, the Court now publishes its findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
In 2002, Debtor was a mortgage loan originator who earned $270,922. In July 2003, he began working for a bank earning $3,000 per month. In June 2004, Debtor purchased a business and quit his bank job. He soon discovered his new company had serious financial problems the prior
In July 2004, Debtor retained Plaintiff law firm to represent him and his company in an attempt to rescind the purchase of the company from its prior owners on the grounds that the financial condition of the company had been misrepresented. Debtor agreed to pay Plaintiff on an hourly basis, with invoices for fees and costs to be paid monthly. Walter Gordon, a sole practitioner in Hartwell, Georgia, was retained as local counsel on a similar fee basis. Thereafter, litigation against the prior owners and other defendants ensued in the Superior Court of Franklin County, Georgia.
By March 2005, Debtor had run up a sizeable unpaid amount of fees and costs to both Plaintiff and Mr. Gordon. Debtor owed Plaintiff approximately $60,800 and Mr. Gordon approximately $18,000. A conference was scheduled in Mr. Gordon's office in Hartwell, Georgia, to discuss the status and prospects of the litigation and how the fees could be brought current. Prior to the meeting, Debtor sent an email to David Davenport, a partner at Plaintiff law firm who was handling Debtor's case, complaining about the fees and costs being incurred in the litigation, the lack of progress in the litigation and concluding with a derogatory joke about lawyers. Robert Lamar, a partner at Plaintiff law firm who was in charge of Debtor's account at the firm, responded by letter in which Mr. Lamar gave his analysis of the status of the litigation, his response to the complaints about the fees and costs and advised Debtor that if the fees and costs were not brought current, the firm would withdraw from representation and place an attorney's lien on all work product until the fees and costs were paid.
The meeting occurred on March 18, 2005. At the meeting, Plaintiff contends that Debtor represented that his accountant had prepared an amended tax return and that he would receive a tax refund of approximately $100,000, which would be enough to pay current and future fees. Plaintiff asserts that, in reliance on these representations, Plaintiff continued to represent Debtor and did not begin collection of its fees.
The litigation was thereafter settled in stages, with settlements with each of the defendants occurring at different times. The settlements reduced Debtor's remaining financial obligations to the defendants. All matters relating to the litigation and settlement were concluded by March 2006.
On June 15, 2005, Debtor and his wife signed an amended tax return for the 2002 tax year for the refund in question. However, rather than a refund of approximately $100,000, the amended return sought a refund of only $60,718. This amount was further reduced by the IRS in October 2005 to $59,851.
Plaintiff and Debtor had another meeting on November 2, 2005, to discuss the
Ultimately, in June 2006, Plaintiff and Mr. Gordon allegedly learned Debtor had received and spent the refund in his business and would not use the refund to pay their fees. Plaintiff filed suit against Debtor for the unpaid fees and costs and received a judgment in October 2012 in the Superior Court of Hart County, Georgia for $104,179.60. Debtor and his wife filed Chapter 7 bankruptcy in January 2013.
Plaintiff asserts that Debtor made misrepresentations about the tax refund at both the March and November 2005 meetings. Plaintiff contends that it justifiably relied on these representations and continued to represent Debtor and forego collection of its fees. Accordingly, Plaintiff contends its claim of $104,179.60, evidenced by the judgment from the Superior Court of Hart County, Georgia, is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).
Plaintiff has the burden of proving by a preponderance of the evidence that the claim is nondischargeable. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). If Plaintiff fails to prove any of the elements of the claim:
quitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir.1994).
11 U.S.C. § 523(a)(2)(A) bars in relevant part, the discharge of debts for services or an extension or renewal of credit resulting from "false pretenses, a false representation, or actual fraud...."
Johannessen v. Johannessen, 76 F.3d 347, 350 (11th Cir.1996).
A fraudulently induced forbearance from collection constitutes an extension of credit for purposes of 11 U.S.C. § 523(a)(2)(A). Ojeda v. Goldberg, 599 F.3d 712, 718 (10th Cir.2010); Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 132-33 (4th Cir.1999); Wolf v. Campbell (In re Campbell), 159 F.3d 963, 966 (6th Cir.1998); Field v. Mans, 157 F.3d 35, 43 (1st Cir. 1998). Further:
SunTrust Bank v. Brandon (In re Brandon), 297 B.R. 308, 313 (Bankr.S.D.Ga. 2002).
Caspers v. Van Home (Matter of Home), 823 F.2d 1285, 1287 (8th Cir.1987), abrogated on other grounds by Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
By letter dated March 9, 2005, Mr. Lamar advised Debtor that unless the fees owed to Plaintiff and Mr. Gordon were brought current promptly, the firms would withdraw from the representation and place an attorney's lien on all of their work product. The evidence establishes that Debtor understood that the trial of his state court litigation was to take place within the next few months.
Debtor testified that he called his accountant, Mike Strickland, CPA, before the meeting to discuss possible sources of cash. According to Debtor, Strickland told him the IRS allowed recouping of losses from the business against taxes previously paid and inquired about Debtor's 2002 and 2003 income.
Mr. Lamar testified that Debtor told them that the amended return had been prepared, was ready for filing, and that he would be getting $100,000 back, which he would use to pay their fees. Mr. Gordon testified that Debtor told them he felt like the refund would be approximately $100,000 and that he would use the money to pay their fees. However, Mr. Gordon
Plaintiff contends that Debtor's representations regarding the possible tax refund were false for two reasons. First, Plaintiff contends that Debtor falsely represented that the amended return had been prepared and was ready to file. Secondly, Plaintiff contends that Debtor knowingly lied about the refund amount because Debtor knew the refund would not be approximately $100,000.
As for the alleged misrepresentation that the amended return had been prepared by the March 18, 2005 meeting, the evidence is conflicting. The evidence establishes that the return had, in fact, not been prepared by that time. Mr. Lamar testified that Debtor represented that it had. Both Debtor and Mr. Gordon testified that no such representation was made. In light of the fact that Mr. Gordon has no financial interest in this litigation (and even if he did, his testimony would be adverse to that interest), the Court is inclined to accept his version of facts and finds that Plaintiff has failed to prove by a preponderance of the evidence that Debtor represented at the March meeting that the amended return had already been prepared.
However, the Court does find that Plaintiff has carried its burden to prove that Debtor knowingly made a false representation with intent to deceive when he represented that the refund would be approximately $100,000. As stated, Debtor gave two slightly different versions of his conversation with Strickland. In the first version, he testified that he reported to Strickland his 2002 income of $295,000 and his 2003 income of $18,000, a total of $313,000. If Strickland assumed a tax rate of 28 percent, as Debtor testified, the taxes on $313,000 income would be $87,640. The Court does not believe that an experienced CPA would have told Debtor, based on these numbers, that the taxes paid (and thus the amount eligible for refund) would have been approximately $100,000.
In the second version, he testified that he gave Strickland his 2002 income of $260,000 from either his last paycheck or his 2002 W-2 form. He then added his wife's income for 2002 and 2003 and his 2003 income, and from this information, Strickland came up with taxes (and thus a potential refund) of $104,000 to $105,000. From the 2002 amended return, we know that Debtor and his wife's adjusted gross income for 2002 was $296,325, on which they paid taxes of $68,190. Debtor and his wife's total income in 2003 was at most $60,000.
Accordingly, the Court does not believe Debtor's testimony that he honestly thought that he would receive a refund of approximately $100,000. Rather, the Court finds that Debtor knowingly misrepresented the amount of the tax refund to prevent Plaintiff from withdrawing from representing him and beginning collection activities.
Debtor testified that after receiving the tax refund in late October 2005, he called Mr. Lamar to schedule a meeting to discuss
Debtor's wife, Mrs. Appling, gave testimony that was generally consistent with Debtor's version. She testified that Debtor told Mr. Lamar that he had received the refund but did not disclose the amount. At trial she produced a copy, but not the original, of notes she said she made at the meeting and completed on their drive home. She said the original was somewhere in multiple boxes of files and she had found the copy in a box of bills a couple of months before the trial. The notes state "I too have to make a business decision & decide to try to keep the business open as long as I can"
Mr. Lamar's recollection of the meeting was very different. Although he testified he refused the request to reduce the bill and to take on the new litigation, he testified that when he asked Debtor whether Debtor had received the refund, Debtor said his accountant had not properly handled the amended tax return, that Debtor had to refile it and that Debtor had not yet received the refund. Mr. Lamar testified that Debtor represented he still expected to get an amount sufficient to recover all of the fees and, based upon that representation, Plaintiff continued to represent Debtor and did not pursue immediate collection efforts.
Mr. Lamar testified that he did not learn until June 2006 that Debtor had received and spent the refund money and was not going to pay anything to Plaintiff. Upon learning this, Mr. Lamar immediately wrote a letter to Debtor, dated June 26, 2006, recapping the course of the litigation, reminding Debtor of his promise to use the refund to pay the fees, stating that Plaintiff had just learned that the refund had been received and spent and threatening
Debtor responded by letter dated July 19, 2006, in which Debtor complained about how his case had been handled, the amount of the fees, Plaintiff's refusal to reduce the fees and Plaintiff's refusal to pursue new litigation. He then reported in the letter that after the November meeting, he met with a bankruptcy attorney who recommended that Debtor keep the money to try to keep the business open. He further stated "There was nothing fraudulent on my part in not giving you that refund. It should be obvious as to what I chose to do since we are still open."
Having heard the evidence, observed the demeanor of the witnesses and reviewed the documents introduced, the Court finds that Plaintiff has proven by a preponderance of the evidence that Debtor, with intent to deceive, made an intentional and knowingly false representation at the November 2005 meeting that he had not yet received the refund. The Court does not believe the testimony of Debtor and his wife. Both Debtor and his wife gave conflicting testimony as to what Debtor told Mr. Lamar at the November meeting. The finding of a copy, but not the original, of the alleged notes from the November meeting seems suspicious. Given Debtor's propensity to recount past events in the light most favorable to his perspective, the Court believes that if he had told Mr. Lamar at the November meeting that he had received the refund, that it was less than expected, and that he planned to use it to keep the business open instead of paying Plaintiff, Debtor would have reminded Mr. Lamar of this in his July 2006 letter. That he did not do so strongly suggests that it did not happen.
On the other hand, Mr. Lamar's actions in sending the letter in June 2006, is consistent with his testimony that Debtor told him at the November meeting that he had not yet received the refund. Accordingly, the Court finds Mr. Lamar's testimony more credible.
In addition, the Court finds that Debtor intentionally mislead Plaintiff and committed a false pretense by not disclosing the true amount of the refund at the November meeting. Based on his prior representation at the March meeting, Debtor knew that Mr. Lamar believed the refund was supposed to be approximately $100,000. Debtor testified he told Mr. Lamar at the November meeting that the refund was less than expected but he did not disclose the actual amount of the refund. Mr. Lamar testified Debtor continued to represent the refund was sufficient to cover all fees.
The Court does not believe Debtor's testimony. Given the amount of outstanding fees and that the refund was the sole source of payment, had Debtor told Mr. Lamar that the refund was less than expected, Mr. Lamar would have demanded to know the exact amount so that he could make a decision as to how his firm would proceed. By failing to disclose that the actual refund was forty percent less than previously represented, and an amount insufficient to pay the outstanding fees owed to Plaintiff and Mr. Gordon, Debtor committed
Having determined that Debtor made misrepresentations regarding the tax refund with intent to deceive, the Court now turns to the reliance requirement. As this Court previously held in denying Debtor's motion to dismiss:
Mr. Lamar testified that Plaintiff agreed to continue its representation of Debtor and forego collection activities in reliance upon Debtor's representations regarding the tax refund. He testified that with respect to both meetings, had Plaintiff known the truth, Plaintiff would have immediately withdrawn from the representation, placed an attorney's lien on Debtor's file and begun collection activities. There was no evidence to the contrary.
Debtor argues that Plaintiff could not justifiably rely on Debtor's representations because Plaintiff was fully aware of Debtor's precarious financial condition and had asked Debtor's mother to assist Debtor in paying the bill. However, Plaintiff's knowledge of Debtor's financial condition supports Plaintiff's justifiable reliance. Plaintiff clearly believed that the tax refund was the only source of cash Debtor would have to pay the fees. Plaintiff was aware of no facts which would have led it to doubt its client's representations about the amount of the refund or the timing of its receipt and, thus, was not on notice to conduct any further inquiry. Accordingly, Plaintiff was justified and did rely on Debtor's representations regarding the tax refund.
Debtor argues that Plaintiff is only entitled to those damages which arose after the alleged misrepresentations. He contends that because his payments after the meetings exceeded the fees earned, any nondischargeable amount must be significantly less than the full amount of
In re Appling, at 254-55.
The Court also rejects Debtor's argument that Plaintiff has failed to show how it could have collected its debt, given Debtor's financial condition. In Wolf v. Campbell (In re Campbell) the Sixth Circuit stated:
159 F.3d 963, 966-67 (6th Cir.1998).
In this case, when the March 2005 meeting occurred, Debtor owed Plaintiff $60,819.97. When the November meeting occurred, Debtor owed Plaintiff $58,796.32. Those fees were due and payable at those times. As a result of Debtor's misrepresentations, Plaintiff agreed to continue to represent Debtor and to not withdraw or attempt collection of the fees. Thus, Plaintiff gave Debtor an extension with respect to the fees and costs then due. This made the entire debt nondischargeable.
Plaintiff's claim against Debtor of $104,179.60 is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). An order in accordance with this memorandum opinion will be entered.
