Opinion
No. 7-02-10754 MR, Adversary No102-1074 M
February 27, 2004
David N. Hernandez, Albuquerque, NM, for Plaintiff
R. Trey Arvizu III, Roswell, NM, for Defendant
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The Court held a trial on this adversary proceeding to determine the dischargeability of a particular debt under 11 U.S.C. § 523(a)(2)(A) on January 29, 2004 in Roswell, New Mexico, at which time the Court took the matter under advisement. Plaintiff Walther Larkin, LLP (Larkin) was represented by David N. Hernandez, and Defendant Melissa Ann Terry was represented by R. Trey Arvizu. After considering the evidence and the testimony of the witnesses at trial, and being otherwise sufficiently informed, the Court finds that Plaintiff failed to meet its burden of showing that the debt at issue is non-dischargeable under 11 U.S.C. § 523(a)(2)(A).
FINDINGS OF FACT
1. In March of 2001, Defendant retained Plaintiff to represent her in a dissolution of marriage proceeding then pending in the Fifth Judicial District Court for the State of New Mexico.
2. Defendant informed Plaintiff that she could not afford to pay a retainer fee for Plaintiffs services.
3. Plaintiff and Defendant agreed that the attorneys' fees owing to Plaintiff would be paid from the anticipated proceeds from the division of property awarded to Defendant under the Marital Settlement Agreement.
4. Plaintiff did not produce a signed copy of the fee agreement between Plaintiff and Defendant, though Defendant does not refute the agreement or claim that she did not sign it.
5. A portion of Plaintiffs attorneys fees were paid from the proceeds of the sale of certain marital property during the course of the dissolution proceedings.
6. During the course of the dissolution of marriage proceedings, Defendants former spouse suffered a stroke, and Plaintiff and Defendant determined that they would need to change their strategy regarding property settlement to request a greater portion of Defendants former spouses American Bar Association 401(k) retirement account (401(k) Account) to cover Defendants alimony needs.
7. Defendant and her former spouse entered into a Marital Settlement Agreement on October 2, 2001, which was filed in the Fifth Judicial District Court on October 3, 2001. (See Plaintiffs Exhibit 2).
8. Defendant was awarded $220,000 from the 401(k) Account under the terms of the Marital Settlement Agreement.
9. Plaintiff discussed with Defendant the amounts Defendant would need to withdraw directly from the 401(k) Account as a cash distribution to pay certain anticipated expenses, including Plaintiff's attorney's fees.
10. Defendant understood and agreed that the purpose of the Marital Settlement Agreement was to enable her to pay her attorneys' fees and living expenses from the proceeds of the 401(k) Account.
10. In October of 2001, Plaintiff agreed to flat fee the outstanding balance of its attorneys fees for Plaintiffs representation of Defendant in connection with the dissolution of marriage proceedings.
11. After the Marital Settlement Agreement was entered into, but prior to any distribution, Defendant discussed the rollover from the 401(k) Account with at least two different financial planners who advised Defendant that she should not pay off her creditors from an initial distribution from the 401(k) Account, but should try to make payments to her creditors over time.
12. Defendant rolled over the funds from the 401(k) Account into an IRA in December of 2001, after first taking a cash distribution in the approximate amount of $20,000.
13. Defendant did not pay Plaintiff its outstanding attorneys' fees from the 401(k) Account, or otherwise.
14. Defendant first consulted with her bankruptcy counsel in January 2002 regarding the possibility of filing bankruptcy. At the time Defendant first contemplated filing for bankruptcy, she did not know that the outstanding attorneys fees due Plaintiff might be dischargeable.
15. Plaintiff and Defendant had several telephone conversations in November and December of 2001, and in January of 2002 regarding payment of Plaintiffs attorneys fees.
16. Defendant filed her petition for Chapter 7 bankruptcy relief on February 1, 2002, listing Plaintiff as an unsecured creditor with a claim in the amount of $25,500.
17. At the time Defendant filed her bankruptcy petition, she remained liable for certain of her former spouses debts.
DISCUSSION
Debts procured by false pretenses, a false representation, or actual fraud are not dischargeable in bankruptcy. 11 U.S.C. § 523(a)(2)(A). A successful cause of action under 11 U.S.C. § 523(a)(2)(A) requires a showing of the following elements:
The debtor made a false representation; the debtor made the representation with the intent to deceive the creditor; the creditor relied on the representation; the creditor's reliance was [justifiable]; and the debtor's representation caused the creditor to sustain a loss. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996); Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (establishing "justifiable" standard of reliance). Plaintiff bears the burden of proving each element by a preponderance of evidence standard. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The false representation required under the first element must depict past or present facts. See Carroll and Sain v. Vernon (In re Vernon), 192 B.R. 165, 171 (Bankr. N. D. Ill. 1996). In other words, a future promise to pay cannot form the basis of a non-dischargeable debt within the meaning of 11 U.S.C. § 523(a)(2)(A) unless the promise, when made, was made with the positive intent never to repay the debt. See McCrary v. Barrack (In re Barrack), 217 B.R. 598, 606 (9th Cir. B. A. P. 1998) (Noting that "`[A] promise made with a positive intent not to perform or without a present intent to perform satisfies § 523(a)(2)(A).'") (quoting Rubin v. West (In re Rubin), 875 F.2d 755, 759 (9th Cir. 1989)). Proof of intent may be shown from circumstantial evidence. See In re Deil, 277 B.R. 778, 782 (Bankr. D. Kan. 2002) ("The fraudulent intent element need not be shown by direct evidence, but may be inferred from the totality of the circumstances.") (citation omitted). Ultimately, intent to defraud within the meaning of 11 U.S.C. § 523(a)(2)(A) must be based on the totality of circumstances. Young, 91 F.3d at 1375. The circumstantial evidence of Defendants intent to defraud is based primarily on the fact that
Defendant received $220,000 under the Marital Settlement Agreement as her share of the 401(k) Account and did not take an initial distribution subject to taxes and penalties sufficient to pay her outstanding attorneys fees, but instead withdrew only $20,000, leaving a balance in excess of $150,000 in an individual retirement account that Defendant lists in her bankruptcy schedules as an exempt asset. It is troubling that Defendant did not pay the outstanding attorneys fees due Plaintiff from the proceeds of the 401(k) Account despite her apparent ability to do so. However, absent more, the failure to pay, even without a good excuse, does not create a non-dischargeable debt within the meaning of 11 U.S.C. § 523(a)(2)(A). See Vernon, 192 B.R. at 171 (The mere proof of an unfulfilled promise is insufficient to show fraudulent intent under § 523(a)(2)) (citation omitted); Farina v. Balzano (In re Balzano), 127 B.R. 524, 531 (Bankr. E. D. N.Y. 1991) (A bare promise to be fulfilled in the future, which is not carried out, does not render a consequent debt nondischargeable under § 523(a)(2)(A).) (citation omitted). Plaintiff must show that the misrepresentation was made with the intent to defraud at the time the debt was incurred. See Harrison, 301 B.R. at 854 ([C]entral to the concept of fraud is the existence of scienter which, for purposes of § 523(a)(2)(A), requires that it be shown that at the time the debt was incurred, there existed no intent on the part of the debtor to repay the obligation.) (citations omitted); In re Abraham, 247 B.R. 479, 483 (Bankr. D. Kan. 2000) (plaintiff required to show circumstantial evidence of defendants fraudulent intent at the time he made the promise to pay). Plaintiff appears to concede that Defendant did not make a false representation regarding payment of its attorneys fees at the outset of Plaintiffs representation of Defendant in the marital dissolution proceedings. Defendant clearly informed Plaintiff that she had no ability to pay a retainer and would have to pay Plaintiffs attorneys fees from her portion of the marital property awarded to her as part of the marital dissolution proceedings. A portion of Plaintiffs attorneys fees were paid from the proceeds of the sale of certain marital property. During the course of Plaintiffs representation of Defendant, the 401(k) Account became the primary asset available to satisfy Defendants alimony needs, and Plaintiff and Defendant changed their strategy for negotiating the Marital Settlement Agreement to request a larger portion of the 401(k) Account. At that time, Defendant agreed that she would pay Plaintiffs attorneys fees from her portion of the 401(k) Account.
Cf. EDM Machine Sales, Inc. v. Harrison (In re Harrison), 301 B.R. 849, 854 (Bankr. N. D. Ohio 2003 ) (though court ultimately determined the debt at issue was dischargeable, defendant in § 523(a)(2)(A) action used insurance proceeds to cover payroll, including paying himself his full salary, instead of using the insurance proceeds as promised to repay debt).
The evidence submitted at trial fails to show that when Defendant agreed to pay Plaintiff its attorneys fees from the 401(k) Account, she had no present intent to do so. Where there is room for an inference of honest intent, the question of fraudulent intent must be resolved in favor of the debtor. Vernon, 192 B.R. at 172 (citations omitted). Defendant testified that she did not determine that she would not pay Plaintiff its attorneys fees from the 401(k) Account until after she met with at least two different financial advisors who recommended that she not pay her creditors from a lump sum initial distribution from the 401(k) Account, but that she repay her creditors over time. In addition, at the time Defendant determined she would not pay the fees from the 401(k) Account, Plaintiff had already completed its representation of Defendant. The telephone conferences between Plaintiff and Defendant that occurred in November and December of 2001 and January of 2002 concerned payment of Plaintiffs fees, which Plaintiff testified were flat feed as of October 2001. Any implied continuing representation that Defendant would pay Plaintiffs attorneys fees from the 401(k) Account that took place after Plaintiff agreed to flat fee the outstanding balance of its attorneys fees would not have taken place at the time the debt was incurred. See Harrison, 301 B.R. at 854. Finally, Defendant testified that she did not contemplate filing bankruptcy until January of 2002 when she first consulted with her bankruptcy attorney. At that time she did not expect that the attorneys fees due Plaintiff would be included as part of the debt to be discharged through her bankruptcy. Thus it cannot be inferred that at the time Defendant made the promise to pay Plaintiff its attorneys fees from the 401(k) Account she planned to discharge the debt through bankruptcy.
Cf. Vernon, 192 B.R. at 172 (remarking as follows: One can imagine a set of facts wherein some client might give her lawyer a clear promise of payment of known fees before legal work was performed, despite her secret intent at the time, evidenced by contemporaneous contact with bankruptcy counsel or otherwise, to discharge her debt.)
CONCLUSION
The circumstantial evidence of Defendants intent presented at trial fails to show that Defendant fraudulently misrepresented her intent to pay her attorneys fees when she had no present intent to do so within the meaning of 11 U.S.C. § 523(a)(2)(A). From the outset of Plaintiffs representation of Defendant, Defendant agreed that she would pay the attorneys fees from the proceeds of her portion of the property settlement awarded to her under the Marital Settlement Agreement. Ultimately, the largest asset awarded to Defendant under the Marital Settlement Agreement was the 401(k) Account. Defendants testimony at trial was that she intended to pay Plaintiff its attorneys fees, and that she did not determine not to repay the attorneys fees from the 401(k) Account until after she consulted with at least two financial advisers who advised her not to repay her creditors from a lump sum distribution from her 401(k) Account, but to attempt to repay her creditors over time. At that point, the Marital Settlement Agreement had already been filed in the state court dissolution of marriage proceedings, and Plaintiff had completed its representation of Defendant. In addition, Defendant did not contemplate filing bankruptcy until January of 2002. Thus, Plaintiff failed to show sufficient circumstantial evidence that Defendant formed a fraudulent intent not to pay Plaintiff its attorneys fees at the time she made the promise. The debt at issue is, therefore, dischargeable.
These Findings of Fact and Conclusions of Law are entered in accordance with Rule 7052, F.R.Bankr.P. An appropriate judgment will be entered. Defendant included a request for attorneys fees under 11 U.S.C. § 523(d) in the event the Court determined that the debt at issue is dischargeable. An award of attorneys fees under 11 U.S.C. § 523(d) is warranted only if the court finds that the position of the creditor was not substantially justified. 11 U.S.C. § 523(d). The Court finds based on the evidence Plaintiff submitted at trial that Plaintiffs position was substantially justified. Defendant is, therefore, not entitled to an award of attorneys fees under 11 U.S.C. § 523(d).
I hereby certify that a true and correct copy of the foregoing was either electronically transmitted, faxed, delivered, or mailed to the listed counsel and parties, on the date file-stamped above.