Opinion
Case No. 95-13454-SSM, Adversary Proceeding No. 95-1499
May 28, 1998
Jack L. Wuerker, Wuerker Triarhos, P.C., Fairfax, VA, for the plaintiff
Patrick J. Blackburn, Anchorage, AK, Counsel for the defendant
MEMORANDUM OPINION
A trial was held in open court on March 11 and 12, 1998, on the plaintiff's complaint objecting to the debtor's discharge and also seeking a determination of dischargeability with respect to its claim against the debtor for unpaid legal fees incurred while representing the debtor in a bitter divorce. At the conclusion of the trial, the court took the matter under advisement in order to permit the parties to submit post-trial memoranda with respect to an issue of usury raised by the court. For the reasons stated in this opinion, which constitutes the court's findings of fact and conclusions of law under F.R.Bankr.P. 7052, the court concludes that the debtor should be denied a discharge.
Findings of Fact
The plaintiff, Hottell Associates, Attorneys at Law, P.C., is a law firm and is the successor in interest to Cohen Hottell, P.C., the law firm that undertook to represent the debtor in a bitter and hotly contested divorce case. The defendant, Lana Susan Bennett ("the debtor"), initially filed a voluntary petition under chapter 13 of the Bankruptcy Code in this court on May 3, 1995, immediately prior to the argument of a summary judgment motion in a state court action brought by the plaintiff to collect its unpaid fees. She then filed a notice of conversion to chapter 7 but failed to appear at the meeting of creditors, and her case was dismissed. She filed a second chapter 13 petition in this court on August 7, 1995, once again on the eve of a summary judgment motion in the state court collection action. On August 28, 1997, this case was likewise converted to chapter 7 on the debtor's motion. The only unsecured claim listed on her schedules, other than a $2,372.58 credit card debt, is the plaintiff's claim for legal fees.
The debtor had retained Cohen Hottell, P.C. in December 1990 to represent her in connection with a divorce from her husband, Trevor Bennett, including issues of child custody and equitable distribution. The debtor was particularly anxious to keep Mr. Bennett, who had a history of violence, from obtaining any sort of custody or visitation with the children. The attorney within the firm handling her case was Dennis M. Hottell, an experienced family law practitioner. The written fee agreement, which the debtor signed on December 12, 1990, provided for legal services to be furnished on an hourly-fee basis at the rate of $190.00 per hour for Mr. Hottell's time and $50.00 per hour for paralegal and law clerk time. The agreement further provided that bills would be paid in full within 30 days of receipt; that any outstanding balance due for more than 30 days would include a "late payment charge" at the rate of 1.5% per month; and that if the account were "subjected to collection proceedings," the debtor was responsible "for reasonable legal fees and costs incurred by the attorney in collection of [the] account."
The divorce case, which was filed in January 1991 in the Circuit Court of Arlington County, Virginia, proved exceptionally time-consuming, not only because of Mr. Bennett's actions — which included repeated threats of violence against the debtor, repeated failure to comply with the orders of the divorce court, and the communication to the debtor's employer of allegations concerning the debtor's conduct — but also because of the debtor's insistence to her attorney that Mr. Bennett not be permitted any visitation or contact with the children; that she receive all the marital assets, in particular a rental townhouse owned jointly by the parties; and that Mr. Bennett not be awarded any portion of her government pension. Additionally, after the two-day equitable distribution hearing in September and October, 1991, the presiding judge, Judge Monroe, after issuing a letter opinion that was generally favorable to the debtor's position but which did not give her all she wanted — in particular, the rental townhouse — suffered a stroke and did not return to the bench. As a result, the cross-motions for reconsideration had to be argued in front of another judge, Judge Sheridan. The case itself was made even more unattractive because Mr. Bennett's threats of violence extended also to Mr. Hottell.
During the first six months or so of the representation, the debtor paid the law firm's bills on a timely basis. After that, she fell behind in her payments, and by the time of the equitable distribution hearing, she owed the law firm approximately $13,000. Mr. Hottell advised her prior to the equitable distribution hearing that he did not consider hers a pro bono case, and that he would seek to withdraw as her attorney if his bill was not paid. She told him she did not have the money but assured him she would pay him out of any equitable distribution award, and, in particular, out of the proceeds of the sale of the rental townhouse if that were awarded to her.
Mr. Hottell believed her and continued to represent her in the equitable distribution hearing and the motion for reconsideration, which was heard in July 1992. The motion for reconsideration went extremely well for the debtor. The judge awarded her the townhouse, which was estimated for equitable distribution purposes to have an equity of $20,000.00, and barred Mr. Bennett from any contact or visitation with the children. She kept the entirety of her own pension, and received an award of child support in the amount of $947.72 per month — which was the approximate monthly amount of her former husband's pension. The final decree of equitable distribution, custody, and child support additionally granted the debtor judgment against her former husband in the amount of $10,000, with interest at 9% per annum, and for attorney's fees in the amount of $16,111.248 [ sic]. The decree also provided, however, that the transfer of the rental townhouse would constitute a $20,000 credit against the "$28,006.68 judgment," and a schedule attached to the decree seems to indicate that the total net money judgment being entered in favor of the debtor was $8,006.68.
To say that the decree is highly confusing on this point would be an understatement. The sum of the $10,000 attorney's fee award in ¶ 11 of the decree and the "$16,111.248" support arrearage in ¶ 15(E) is not $28,006.68, but rather $26,111.24. The schedule attached to the decree reflects attorney's fees of $10,000 and a child support arrearage of $18,006.68 as of January 21, 1992, for a total of $28,006.68, which, after a $20,000 credit for the transfer of the townhouse, results in a "Remaining Child Support Judgment" of $8,006.68. The court can only conclude that the child support arrearage that went into the computation was paid down between the time of the hearing before Judge Monroe and the hearing before Judge Sheridan.
Although the decree contained language providing for the payment of the child support from Mr. Bennett's military pension, the debtor, several weeks after the hearing, instructed Mr. Hottell's office not to continue with efforts to attach Mr. Bennett's military retired pay. She did so because she was afraid that Mr. Bennett would be able to learn where she and the children resided and was fearful that having his retired pay attached would enrage him. She considered foregoing the $947 per month in child support to be cheap "insurance" in terms of avoiding possible actions he might take if she attempted to enforce the award. From the evidence presented, it does not appear that Mr. Bennett has ever paid a dime of the child support that he was ordered to pay or that the debtor has any intention of seeking to enforce the award.
After the final equitable distribution hearing, the debtor stopped communicating with Mr. Hottell. She did, however, agree to meet with him on October 14, 1992, to discuss the then-outstanding balance of $36,713.64 she owed his firm. At that meeting, she told him that she felt his fees were excessive and expressed dissatisfaction at the way the case had been litigated. She also told him that she had felt that way at least since the start of the equitable distribution hearing in September 1991, but that she had not told him of her dissatisfaction, or of her intent not to pay his bill in full, because she knew that he would withdraw from representing her. She did ultimately offer to pay $20,000, but Mr. Hottell was not willing to reduce his bill below $27,535. He wrote her after the meeting, expressing his shock that she had deliberately kept from him her dissatisfaction in order that he would not withdraw from representation; she did respond to this letter.
In the meantime, she had put the rental townhouse on the market, and on December 28, 1992, she sold it for a net to her, after closing costs and payoff of the mortgage, of $48,799.36. She considered sending Mr. Hottell $20,000 of the settlement proceeds but decided against doing so because she did not believe he would accept that as full payment and because "friends" and "another attorney" had told her Mr. Hottell's fees were too high. She had been informed at or around this time that Mr. Hottell intended to sue her for his unpaid fees.
Shortly thereafter (January 21, 1993), the plaintiff filed an action against her in the Circuit Court of Fairfax County seeking judgment in the amount of $37,837.00 plus reasonable attorney's fees. In that action, the debtor was sanctioned for failing to comply with discovery requirements. As noted above, she filed her first chapter 13 petition immediately prior to the hearing on a summary judgment motion filed by the plaintiff. When the bankruptcy petition was dismissed for failure to appear at the meeting of creditors — which she testified was because she knew her attorney was in Alaska on the scheduled date of the meeting, and she assumed he had taken some action to get it continued — she took no step to have the order of dismissal vacated, and, instead, simply waited until the plaintiff reset the summary judgment motion for hearing in the state court and then filed a new chapter 13 case, which she promptly converted to chapter 7.
The principal amount of the unpaid fees was $32,403.61. The balance of the amount sued for consisted of interest charges.
The schedules and statement of financial affairs filed by the debtor in this case are not, to say the least, a model of completeness and accuracy. The schedules listed the amount in her checking and savings account as being $660.00, when her actual balance on the filing date of $2,563.44, and never dropped below $1,500 at any time during the month. On her statement of financial affairs, she represented that he had not received any income other than her salary in the two years prior to filing, when in fact she had received $122.84 in interest income. Additionally, she listed the fair market value of her house at $244,000 — the value at which it was assessed for real estate tax purposes — even though she was aware of, and had in her possession, a recent appraisal done for a lender reflecting that the property was worth $275,000. She testified at trial, however, that she believed that the appraisal, which she said had been commissioned by a "very aggressive mortgage company," was "inflated." She did not list on her schedule of assets any entitlement to income tax refunds, although she has since prepared Federal income tax returns — not yet filed — for 1994 and 1995 showing Federal income tax refunds due in the amount of $6,506 and $6,146, respectively, and Virginia income tax refunds in the amount of $1,064 and $1,127, respectively. She testified at trial, however, that she owes — again, based on returns prepared but not yet filed — $17,409 in Federal income taxes for 1992 and $3,747 in Virginia income taxes for that year. She also testified that at the time she prepared her bankruptcy schedules, she had not prepared any returns for the years 1992 through 1995 and did not know what her 1992 liability would be, although she believed she would owe a substantial amount of taxes because of capital gains from the sale of the townhouse. On her statement of financial affairs, she responded "none" to the question asking for payments on account of debts made within 90 days of the bankruptcy filing, although she had made regular second mortgage payments of $904.75 per month during that time. She also responded "none" to the question on the statement of financial affairs seeking information as to any transfers of property, either absolute or for the purposes of security, within one year prior to filing bankruptcy, although she had sold a Rolex watch in December 1994 in order to make up some late mortgage payments, had pledged her Volvo automobile as collateral for a $10,000 loan in October 1994, and had placed a $34,000 second deed of trust on her house in April 1995. All of the loan proceeds, she testified, had been spent prior to her bankruptcy filing. Finally, she did not list on her schedules the judgment in her favor for child support and attorney's fees nor her right to on-going child support. She testified at trial that the reason she omitted the judgments and the child support obligation was that she "did not even think about it."
Conclusions of Law and Discussion I.
The court has subject matter jurisdiction over this action under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Under 28 U.S.C. § 157(b), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge. Venue is proper in this district under 28 U.S.C. § 1409(a). The defendant was properly served and has appeared generally.
II.
The court will first consider the objection to the debtor's discharge, since, if the debtor is denied a discharge altogether, the issue of whether a particular debt is dischargeable is essentially moot.
Under § 727(a), Bankruptcy Code, the court is required to grant a chapter 7 debtor a discharge unless, among other things,
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated or concealed —
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;
* * *
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false oath or account[.]
In a complaint objecting to the debtor's discharge under § 727, the burden of proof is on the objecting party, and the standard of proof is preponderance of the evidence. Harmon v. McGee (In re McGee), 157 B.R. 966, 973 (Bankr. E.D. Va. 1993). Once the creditor has established a prima facie case, however, the burden shifts to the debtor to provide satisfactory explanatory evidence to rebut the allegations. Farouki v. Emirates Bank Int'l. Ltd., 14 F.3d 244, 250 (4th Cir. 1994) ("While the burden of persuasion rests at all times on the creditor objecting to discharge, it is axiomatic that the debtor cannot prevail if he fails to offer credible evidence after the creditor makes a prima facie case.")
With respect specifically to § 727(a)(4), courts have recognized that competing concerns are present. Hatton v. Spencer (In re Hatton), 204 B.R. 477, 482 (E.D. Va. 1997) (Smith, J.); National Post Office Mail Handlers, Watchmen, Messengers and Group Leaders Division of the Laborers' Int'l. Union of North America, AFL-CIO v. Johnson (In re Johnson), 139 B.R. 163, 165 (Bankr. E.D. Va. 1992), citing Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987). On the one hand, bankruptcy is equitable remedy, wherein "the statutory right to a discharge should ordinarily be construed liberally in favor of the debtor." Id. at 166. On the other hand,
the very purpose of § 727(a)(4)(A) is to ensure that "those who seek the shelter of the bankruptcy code do not play fast and loose with their assets or with the reality of their affairs," and that "complete, truthful, and reliable information is put forth at the outset of the proceedings, so that decisions can be made by the parties in interest based on fact rather than fiction."
Id. These conflicting goals, as the Tully court cautioned, require careful and "evenhanded" consideration. Id.
As the Fourth Circuit explained in Williamson v. Fireman's Fund Insurance Co. (In re Williamson) 828 F.2d 249, 251 (4th Cir. 1987), "[i]n order to be denied a discharge under this section, the debtor must have made a statement under oath which he knew to be false, and he must have made the statement willfully, with the intent to defraud." Further, "because a debtor is unlikely to testify directly that his intent was fraudulent, the courts may deduce fraudulent intent from all the facts and circumstances of a case." Id., quoting In re Devers, 759 F.2d 751, 753-54 (9th Cir. 1985); Spencer v. Hatton (In re Hatton), 204 B.R. 470, 475 (Bankr. E.D. Va. 1997) (Adams, J.), aff'd 204 B.R. 477 (E.D. Va. 1997). Additionally, "the false oath made by the debtor must have related to a material matter." Williamson, 828 F.2d at 251. The subject matter of a false oath is "material," and thus sufficient to bar discharge, "if it bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property." Id., citing In re Chalik, 748 F.2d 616, 618 (11th Cir. 1984).
In the present case, the court has little difficulty in determining that the debtor, in preparing her schedules, which she signed under penalty of perjury, made little or no effort to present a complete, accurate and truthful picture of her financial situation. It is true that mere sloppiness, forgetfulness, or negligence in preparing schedules is not sufficient to deny a debtor a discharge. And it is also true that any single omission or inaccuracy of the type appearing on the debtor's schedules might reasonably be charged off to negligence rather than a conscious attempt to be less than forthcoming with her creditors and the chapter 7 trustee. But in this case the consistent pattern of omissions and inaccuracies leads inexorably to the conclusion that they were made willfully, with knowledge of their falsity, and with intent to mislead creditors and the chapter 7 trustee.
In reaching this conclusion, the court has, of course, carefully weighed the explanations given by the debtor in her testimony for the various omissions. Based on the court's ability to observe her demeanor, the court did not find the debtor to be, in general, a credible witness. In testifying, she often smirked, as though the trial were essentially a joke. Her explanation that the bank account balance she showed on her schedules was based on a balance from a recent statement from which she had mentally subtracted checks she had written that had not yet cleared seems highly unlikely in view of the fact that, although there were no subsequent large deposits during that month, the balance never dropped below an amount nearly two-and-a-half times the amount shown on her schedules.
The use of the tax assessment as the "fair market value" of real estate is certainly not uncommon nor is it censurable where debtors do not have some other indication of value. Here, however, the debtor made a point on her schedules, when asked for the fair market value of the house, to specifically state that the value shown was the current real estate tax assessment. That statement, while literally true, was unresponsive to the question, and the fact that she chose to make an issue of it suggests strongly that she knew it was unresponsive. Even if the debtor genuinely believed that the $275,000 appraisal was, as she testified, "inflated" so that an "aggressive" mortgage company could make a second trust loan against the property, the court believes the debtor also did not want the appraised value disclosed because it could have prompted an effort by the trustee to sell the property.
She testified that the trustee did in fact list the property for "$250,000-something" but was unsuccessful in selling it.
With respect to the tax refunds, the debtor testified at trial that she had not filed returns for 1992 and later because she knew she was going to have a significant tax liability for 1992 as a result of the sale of the town house. She did not, however, list any liability to the IRS for that year on her schedules, though she testified at trial that she owed, based on returns she had since prepared but had never filed, $20,950 in Federal and Virginia income taxes for 1992. It is noteworthy that the debtor did belatedly prepare and file 1993 Federal and Virginia returns in the expectation that she was due refunds (not, however, disclosed on her schedules) for that year in the amount of $6,087. The IRS denied her refund request, however, on the ground that it was filed too late, and the Virginia Department of Taxation, instead of sending the debtor a refund, sent her a bill for $2,406. Her tactic of submitting returns for a year in which she expected to receive a refund before filing returns for an earlier year that would show a substantial liability suggests that she was fully aware of the liability and hoped to avoid a setoff of the 1992 tax liability against the refunds and to keep the refunds for herself. Her care in this regard belies any argument that she was not aware, when she filled out her schedules, that she was due refunds for 1994 and 1995, even if she did not know the precise amount at that time. The fact that, ultimately, the trustee might not have realized anything because the taxing authorities would have offset the liabilities for 1992 against the refunds for 1994 and 1995 is beside the point. It is no defense to a § 727(a)(4) action that an asset deliberately omitted from a debtor's schedules turns out, in the end, to have no value. The debtor's duty is to make full disclosure; it is the trustee's duty to evaluate whether a particular asset is worth pursuing. When the debtor does not disclose assets, the trustee is deprived of the opportunity to determine whether, and how, it can be reduced to cash for the benefit of creditors.
As discussed above, she now calculates the total amount of the Federal and Virginia tax refunds for those years at $14,845.
The same is true with respect to the judgment against her former husband. The debtor was not entitled to omit it from her schedules because of her fear that the trustee's pursuit of it would provoke her husband. The trustee, if informed of all the circumstances, might have abandoned the abandoned the judgment as an asset of the estate. That decision, however, was one for the trustee to make, not the debtor by simply omitting the judgment from her schedules.
I reach a different conclusion with respect to the omission, from the debtor's schedule of current income, of the child support that she has never received, and has never sought to collect, from her former husband. The debtor made a calculated decision to forego that support in order to keep her former husband out of her and her child's life. Schedule I is intended to represent the reality of the debtor's actual current income. Under the circumstances, the omission of an abstract right to child support that she has never received, and does not intend to pursue, is not fraudulent.
Indeed, Mr. Hottell's own testimony is that the winning argument that convinced Judge Sheridan to award the debtor the townhouse was that "the judgments [are] worthless if you don't give her the townhouse."
Having considered all the evidence in light of the standard enunciated in Williamson, the court concludes that the plaintiff has carried its burden of proof of showing that the debtor made a false oath in her bankruptcy case sufficiently material to justify the denial of discharge. Accordingly, the debtor will be denied a discharge.
III.
Having determined that the debtor is not entitled to a discharge, the court must next determine if the plaintiff is entitled to a money judgment on account of its claim, and, if so, the amount of that judgment. In an action to determine the dischargeability of a debt under § 523(c), Bankruptcy Code, a bankruptcy court — under the "Weil-known maxim that once equitable jurisdiction has been properly invoked, it will proceed to render a full and complete disposition of the controversy" — has jurisdiction to also determine the amount of the debt and enter a money judgment. Harris v. U.S. Fire Ins. Co., 162 B.R. 466, 468-69 (E.D. Va. 1994) (Cacheris, C.J.). There is no reason why the same principle should not apply in the context of an objection to discharge under § 727, Bankruptcy Code.
A.
The court has carefully reviewed the bills sent by Mr. Hottell to the debtor and has considered his experience in the field of domestic relations litigation and his explanation of the context in which the legal representation was provided. The court has also considered the debtor's testimony that Mr. Hottell was a disorganized and unfocused advocate and spent too much time on certain tasks. The court finds that the debtor has failed to show that the services provided were not worth the time expended by Mr. Hottell at the hourly rate she agreed to pay. The unpaid fees, calculated according to the contract between the parties, are $32,403.61. In addition, the plaintiff claims "late payment charges" under the contract in the amount of 1.5% per month (18% per annum) on the unpaid balance. A calculation presented at trial showed total late payment charges, as of the start of trial, of $35,627.38. The court had a concern, which it communicated to the parties, whether the charging of interest at 18% per annum would violate the Virginia usury statutes. In post-trial memoranda, the plaintiff argued, and the debtor agreed, that contracts for services are not loans of money or agreements for the forbearance of debt, and are therefore not subject to the Virginia usury statutes. Graeme v. Adams, 64 Va. (23 Gratt.) 225, 234 (1893). Notwithstanding the court's continued concern that the charging of late payment fees by an attorney that exceed what could lawfully be charged as interest on a loan is, at the very least, unseemly and reflects poorly on the legal profession, the debtor has nevertheless not pleaded usury as an affirmative defense to the late payment charges, and it appears that under Virginia law the plaintiff would be entitled to enforce the contract for services as written. Accordingly, the court will enter judgment for the plaintiff against the defendant in the amount of the unpaid bills and contractual late payment charges.
Va. Code Ann. § 6.1-330.55 provides, "Except as permitted by law, no contract shall be made for the payment of interest on a loan greater than twelve percent per year." Va. Code Ann. § 6.1-330.56 provides, "Any borrower may plead in general terms that the contract or assurance on which the action is brought was for the payment of interest greater than is allowed by statute. Once the court has determined that the contract is usurious, judgment shall be rendered only for the principal sum due."
B.
In addition to late payment charges, the plaintiff also seeks judgment for the attorney's fees it incurred in attempting to collect its claim from the debtor. As noted above, the written fee agreement provided that if the account was "subjected to collection proceedings," the debtor was liable for "reasonable legal fees and costs." At trial, the plaintiff presented evidence that it had hired another law firm to pursue the claim and that it had been billed an astonishing total of $72,117.68 — twice the principal amount of the plaintiffs claim — for the litigation both in the Circuit Court of Fairfax County and in this court.
As of the trial, the plaintiff had paid all but approximately $22,000 of this amount.
To say that this court is amazed at the amount of the legal fees would be an understatement. Compared to the original divorce litigation that gave rise to the claim, there was nothing particularly complicated or difficult about this case, either in the state court or this court, that could possibly justify the amount of fees that were charged. In the state court, this was a simple action to collect on a contract for legal services. It never came to trial. While the debtor appears to have been obstructive in terms of providing discovery and showed up for one deposition under medication, requiring the rescheduling of the deposition, no discovery was necessary in order for the plaintiff to have made out its own case. There is no doubt that additional costs were run up when the debtor filed her first chapter 13 petition, then let it be dismissed, and waited until the summary judgment motion was renoticed before filing her second petition. In this court, likewise, costs were undoubtedly run up, for example, when the debtor, having agreed to mediation, then did not show up for the mediation session. But the underlying litigation itself was very simple. Only two witnesses — Mr. Hottell and the debtor — testified at trial, and the testimony of one witness — the debtor's former husband (which added essentially nothing to the plaintiffs case) — was presented by deposition. The trial carried over to a second day only because the court was required to conduct an emergency hearing in another matter prior to the start of the trial in this case.
A review of the bills put into evidence reflects a prodigious amount of time spent in preparation for trial. That the time was actually spent the court does not doubt — but that it needed to be spent is a far different question. This court is familiar, from having to pass on numerous fee applications, with the fees routinely charged by experienced counsel in this court on dischargeability litigation. Based on all the circumstances, and recognizing that every lawyer will prepare differently, and that there can be a wide range of fees that might be considered reasonable, the court nevertheless finds that a "reasonable" fee for the legal services provided to the plaintiff in this court and the Fairfax County Circuit Court should not have exceeded $32,000.00, and the court will therefore award fees to the plaintiff only in that amount.
IV.
Because the court has determined that the debtor is not entitled to a discharge, the issue of whether the plaintiffs claim is nondischargeable is essentially moot. Some brief comment is nevertheless appropriate for the benefit of the parties and reviewing courts in the event an appeal is taken.
A discharge under chapter 7 of the Bankruptcy Code does not discharge an individual debtor from a 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[.]
§ 523(a), Bankruptcy Code. To establish fraud under § 523(a)(2)(A), the following five elements must be proven:
1. That the debtor made representations;
2. That at the time the representations were made the debtor knew them to be false;
3. That the debtor made the representations with the intention and purpose of deceiving the creditor;
4. That the creditor justifiably relied on the representations; and
5. That the creditor sustained the alleged injury as a proximate result of such representations.
Field v. Mans, 516 U.S. 59, 77, 116 S.Q. 437, 447, 133 L.Ed.2d 351 (1995) (holding that the "justifiable reliance" standard is the proper standard to be employed); Fleming v. Preston (In re Preston), 47 B.R. 354, 357 (E.D. Va. 1983) (Kellam, J.); Standex International GmbH v. Bosselait (In re Bosselait), 63 B.R. 452, 457 (Bankr. E.D. Va. 1986) (Shelley, J.); Bank of Virginia v. Davis (In re Davis), 42 B.R. 611, 613 (Bankr. E.D. Va. 1984) (Bostetter, C.J.). The standard of proof is preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).
The alleged fraud in this case is the debtor's representation — made at the time of the equitable distribution hearing to induce Mr. Hottell not to withdraw as her counsel — that she intended to pay his bill in full out of the proceeds of the townhouse if she were awarded it. Of course, mere failure — even willful failure — to abide by a promise of future performance does not constitute fraud. However, making a promise that, at the time it is made, one does not intend to keep does constitute fraud if the other elements are present.
The evidence before the court in this case fairly establishes that, at or around the time of the equitable distribution hearing in September 1991, the debtor became unhappy with the amount of Mr. Hottell's fees and did not intend to pay them out of the proceeds of the sale of the townhouse, if she were awarded it, but instead to attempt to negotiate a compromise of some lesser amount. She nevertheless represented to him the contrary because she did not want to lose his services at a critical juncture in the proceedings, and she clearly expected him to rely on her assurances that he would be paid. In reliance on her assurances, he continued to expend considerable time and effort representing her, which ultimately resulted in her being awarded the townhouse. There is no suggestion that his reliance on her assurances was not justifiable. When Mr. Hottell raised the question of his unpaid bill, the debtor refused to execute an assignment of proceeds but continued to assure him he would be paid. When she sold the townhouse, however, she did not pay him anything, although she testified that she did initially intend to pay him $20,000 out of the proceeds, but changed her mind after deciding that paying that amount would not keep Mr. Hottell from suing her for the balance of the claimed fee.
Accordingly, the court concludes that the fees incurred after the debtor assured Mr. Hottell that she would pay his fees out of the townhouse constitute a debt for services obtained by false pretenses or a false representation and are nondischargeable. Mr. Hottell testified that the unpaid fees at the time he had this discussion with the debtor amounted to approximately $13,000. The bills presented in evidence do not enable the court to determine a more precise figure. Accordingly, if the debtor were entitled to a discharge, the court would determine that $19,403.61 was nondischargeable under § 523(a)(2)(A), Bankruptcy Code, together with late payment charges and reasonable attorney's fees.
Taking as a starting point the computation of late payment charges presented by the plaintiff, and backing out $15,084.99 (18% interest on $13,000.00 in principal from October 1, 1991 until March 11, 1998), leaves $20,542.39 as the amount of late payment charges attributable to the nondischargeable portion of the legal fees.
V.
A separate judgment will be entered denying the debtor a discharge and entering judgment in favor of the plaintiff for $68,030.99, with interest at the Federal judgment rate until paid, together with an attorney's fee of $32,000.00 and the costs of this action.